FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended January 3, 1999.

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

For the transition period from ________ to ________.

Commission File Number 0-17919

                        Surgical Laser Technologies, Inc.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

Delaware                                               31-1093148
-------------------------------                        --------------------
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)

147 Keystone Drive, Montgomeryville, PA                18936-9638
-----------------------------------------              -----------
(Address  of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (215) 619-3600
        Securities registered pursuant to Section 12(b) of the Act: None
           Securities registered pursuant to Section 12(g) of the Act:

                           Common Stock $.01 par value
                           ---------------------------
                                (Title of Class)

               8% Convertible Subordinated Notes Due July 30, 1999
               ---------------------------------------------------
                                (Title of Class)

Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes (X).  No ( ).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.(X)

As of March 15, 1999, the aggregate market value of the voting common equity of
Registrant held by non-affiliates was approximately $3,243,099. Registrant has
no authorized non-voting common equity.

On March 15, 1999 Registrant had outstanding 1,977,879 shares of Common Stock,
$.01 par value.



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                                     PART I

Item 1. Business.

(a) GENERAL DEVELOPMENT OF BUSINESS.

Surgical Laser Technologies, Inc. ("SLT" or "Registrant") was incorporated in
December 1983 under the laws of the State of Delaware. Registrant's principal
offices are located at 147 Keystone Drive, Montgomeryville, Pennsylvania
18936-9638, and its telephone number is (215) 619-3600.

Registrant is engaged in the development, manufacture and sale of proprietary
laser systems for both contact and non-contact surgery. Registrant's Contact
Laser(TM) System, unlike conventional laser systems, enables the surgeon to use
the laser instrument in direct contact with the tissue being treated, thereby
significantly enhancing the ease of use and precision of laser surgery in many
applications. Registrant's Contact Laser was the first Contact Laser surgery
system developed for commercial application, and Registrant holds patent rights
on the Wavelength Conversion(TM) effect technology which is the technological
foundation for Contact Laser surgery. Registrant believes that Contact Laser
surgery represents a significant advancement in laser surgery. Registrant
supplements its contact offerings with non-contact products.

Registrant's Contact Laser System is comprised of a portable laser unit that
delivers laser energy through Contact Laser Delivery Systems. Registrant's
current product line includes four portable laser units of various power levels
and a family of over 100 Laser Probes, Laser Scalpels, fibers and handpieces
that provide different Wavelength Conversion effect properties, power densities
and configurations appropriate for cutting, coagulation or vaporization. The
Wavelength Conversion effect properties permit Registrant's lasers to replicate
the effect of several different laser systems. As a result of the system's
design, a single Contact Laser System can be used within most surgical
specialties to perform a broad range of minimally invasive and open surgical
procedures.

During 1997, Registrant redefined its strategy for growth to include a specific
focus in the surgical specialties of Otolaryngology and Head and Neck surgery
and Neurosurgery (ENT and Neurosurgery). In conjunction with this focused
strategy, Registrant has entered and will continue to seek to enter into
relationships with other companies to expand the use of Registrant's products in
surgical specialties other than ENT and Neurosurgery, and has utilized and will
continue to seek to utilize its strengths in supplying other companies with
products that draw on Registrant's expertise and competencies. While refocusing
its strategy in ENT and Neurosurgery, Registrant will take these other actions
in an effort to enhance sales and to promote continued utilization of its
products and services in those other surgical specialties.

Registrant expanded its product offerings during 1998 and 1997 to include
non-laser based products specifically targeted at the ENT and Neurosurgery
markets. During 1998, Registrant's new product offerings included the
ClearESS(TM) irrigation and suction system and the HemoSleeve(TM), a bipolar
microdebrider sleeve used in endoscopic sinus surgery. The new products offered
in 1997 included a line of reusable handheld instruments. The line of handheld
instruments called MedTREK was expanded during 1998. Registrant will continue to
seek to expand its product offerings within the ENT and Neurosurgery markets.



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During 1998, Registrant continued to supply laser systems to CorMedica
Corporation for CorMedica to incorporate into its proprietary catheter tracking
and navigation system. CorMedica Corporation is a privately-held company engaged
in the design, development and manufacture of proprietary integrated systems for
catheter-based percutaneous transluminal endocardial revascularization
(PTER(TM)) procedures. The laser systems are expected to be used by Cormedica in
its investigational clinical trials for PTER.

In July 1998, the United States Court of Appeals for the Federal Circuit
affirmed the summary judgement of the District Court that Registrant's Contact
Laser probes do not infringe a patent owned by Trimedyne. The appellate court
also reversed the summary judgment of the District Court that Registrant's
SFB1.0 product did not infringe upon Trimedyne's patent, remanding that portion
of the litigation to the lower court for trial. In January 1999, to avoid the
time and costs associated with patent litigation, Registrant and Trimedyne
entered into settlement discussions. (see Part I, Item 3, Legal Proceedings).

In November 1998, Registrant received the necessary Japanese regulatory
approvals to sell its laser delivery systems and accessories in Japan. In
December 1998, Registrant amended its private label supply agreement with Diomed
Limited, a UK based manufacturer and marketer of diode lasers and related
supplies to include sales to Olympus Japan Co., LTD. Under the amendment,
Olympus Japan Co., LTD., will market Registrant's products in Japan under the
Diomed label.

In December 1998, Registrant concluded that certain products under its marketing
rights agreement with MedTREK Corporation and its President would not be
commercialized. (see Note 7 of Notes to Consolidated Financial Statements). As a
result, the net value of the agreement, including the warrants issued, was
written-off in December 1998. The marketing rights agreement provided Registrant
with exclusive worldwide rights to certain new products and medical devices used
within minimally invasive ENT surgery.

In January 1999, Registrant amended its Restated Certificate of Incorporation
with the State of Delaware to effect a one-for-five reverse split of
Registrant's Common Stock (see Part I, Item 4, Submission of Matters to a Vote
of Security Holders). Effective January 15, 1999, Registrant's Common Stock
commenced trading on the Nasdaq SmallCap market at the Registrant's request.
Given the Registrant's current market capitalization, the Registrant believes
that the continued listing requirements of the Nasdaq SmallCap market are more
appropriate for the Registrant's public float characteristics.

There were no other significant changes in Registrant's business during the
fiscal year ended January 3, 1999.

(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS.

Registrant is engaged primarily in one operating segment: the design,
development, manufacture and marketing of laser products and other instruments
for medical applications. See Note 16 of Notes to Consolidated Financial
Statements for segment information.

(c) NARRATIVE DESCRIPTION OF BUSINESS.

Registrant is primarily engaged in the development, manufacture and sale of a
proprietary Contact Laser System for surgery. During 1997, Registrant redefined
its strategy for growth to include a specific focus in the surgical specialties
of ENT and Neurosurgery. In conjunction with this focused strategy, Registrant
has entered and will continue to seek to enter into relationships with other
companies to


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expand the use of Registrant's products in surgical specialties other than ENT
and Neurosurgery, and has utilized and will continue to seek to utilize its
strengths in supplying other companies with products that draw on Registrant's
expertise and competencies. While refocusing its strategy in ENT and
Neurosurgery, Registrant will take these other actions in an effort to enhance
sales and to promote continued utilization of its products and services in those
other surgical specialties. During fiscal 1998, 1997 and 1996, revenues from
sales of Registrant's products and services were $9,393,000, $11,665,000 and
$10,974,000, respectively.

Registrant introduced Contact Laser surgery by combining proprietary Contact
Laser Delivery Systems with its own Nd:YAG laser unit to create a
multi-specialty surgical instrument that can cut, coagulate or vaporize tissue.

Almost all of the surgery performed today, endoscopic or open-cavity, utilizes
two fundamental technologies -- mechanical cutting and clamping, and/or thermal
vaporization and coagulation. The mechanical scalpel, scissors and suture are
universally accepted. However, today's surgery increasingly requires additional
control of bleeding, more precision and better access to diseased sites. Lasers
are suited for this requirement.

With the use of Registrant's Contact Laser System, a precise temperature
profile, or gradient, is created upon contact with the tissue by Registrant's
Laser Probes and Laser Scalpels. It is the temperature that directly causes the
therapeutic effect. If the temperature is sufficiently high, the tissue will be
vaporized (turned from liquid or solid into gas), creating a precise surgical
incision or excision. Lower temperatures coagulate tissue and thus control
bleeding or destroy diseased tissue.

Registrant's proprietary Contact Laser probe and scalpel surface treatments
provide the ability to alter selectively the temperature profile of tissue,
replicating the clinical effect of many different types of lasers. These
treatments are marketed under the trademark "Wavelength Conversion effect." In
addition, Contact Laser surgery restores to the surgeon the advantages of
tactile feedback lost with conventional lasers.

Registrant's revenues are generated primarily by the sale of Contact Laser
Delivery Systems and accessories and Nd:YAG laser units. Registrant's Contact
Laser Delivery Systems consist of proprietary fiberoptic delivery systems which
deliver the laser beam from Registrant's Nd:YAG laser unit via an optical fiber
to the tissue, either directly or through a proprietary Laser Probe or Laser
Scalpel.

Disposable Fiberoptic Delivery Systems. Registrant has designed disposable
optical quartz fibers to channel the laser beam from Registrant's laser unit to
the fiber end, the Laser Probe or the Laser Scalpel or to one of 24
interchangeable, application-specific handpieces that hold the Laser Scalpel or
Laser Probe. These proprietary optical fibers and handpieces are intended for
single use and range currently in list price from $145 to $495.

Laser Probes and Laser Scalpels. Registrant's proprietary Laser Probes and Laser
Scalpels are made of either synthetic sapphire or fused silica and have high
mechanical strength, high melting temperature and appropriate thermal
conductivity. Most of these Laser Probes and Laser Scalpels use Registrant's
patented Wavelength Conversion effect treatments or geometry. Registrant offers
over 60 interchangeable Laser Probes and Laser Scalpels that provide different
power densities through various geometric configurations appropriate for
cutting, coagulation or vaporization. Laser Probes and Laser Scalpels are made
with varying distal tip diameters and surface treatments, each with a different
balance between cutting and coagulation, so that the instrument can be suited to
the particular tissue effect


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desired. Additionally, Registrant markets side-firing and direct-firing
free-beam laser probes. Instead of changing laser units, surgeons may choose a
different Laser Probe or Laser Scalpel to perform a different procedure. The
Laser Probes and Laser Scalpels are intended for limited reuse, and the list
prices currently range from $395 to $520.

Disposable Gas or Fluid Cartridge Systems. Registrant's proprietary cartridge
system provides gas or fluid to cool the junction between the optical fiber and
the Laser Scalpel or the Laser Probe. These cartridges are sterile and used in
one set of procedures. The list price of these cartridges is currently $65.

Reusable Laser Aspiration Handpieces. Registrant's proprietary reusable
stainless steel handpieces are all used with interchangeable laser aspiration
wands and flexible endoscopic fibers. These proprietary handpieces are intended
for intra-nasal/endoscopic sinus and oropharyngeal procedures requiring smoke
and/or fluid evacuation. Wands have a list price of $95, and the handpiece list
prices currently range from $235 to $395.

Laser Units. Registrant markets the CLMD line of Nd:YAG laser units for use with
its Contact Laser Delivery Systems. The line consists of four units: the CLMD
25-watt to tissue, on 110 volts; the CLMD 40-watt to tissue, on 110 volts; the
CLMD Dual which operates up to 40-watts to tissue on 110 volts and up to
60-watts to tissue on 220 volts; and the CLMD 100-watt to tissue, on 220 volts.
The laser units are modularly designed to allow the customer to upgrade from the
25-watt laser to the 40-watt or Dual laser and from the 40-watt laser to the
Dual laser, and thus provide the customer the flexibility and versatility to
change its laser system easily to meet its changing surgery needs. Current list
prices for the lasers are as follows: CLMD 25-watt, 110-volt - $55,000; CLMD
40-watt, 110-volt - $70,000; CLMD Dual - $85,000; and CLMD 100 watt - $95,000.
These prices include a one-year warranty.

Virtually all of Registrant's laser systems and laser delivery systems are
manufactured and assembled at Registrant's Montgomeryville, Pennsylvania
facility. The raw materials used by Registrant are generally available in
adequate supply. Registrant obtains all of its partially finished Laser Probes
and Laser Scalpels from three suppliers in the United States. Registrant
performs materials processing and final assembly on the Laser Probes and Laser
Scalpels using proprietary and patented treatment processes. The fiberoptic
delivery systems, with and without handpieces, are also manufactured by
Registrant. Registrant's sterile gas and fluid cartridge systems are
manufactured exclusively by a domestic supplier in accordance with Registrant's
specifications.

Handheld Sinus Instrumentation. Registrant markets a line of 23 precision
thru-cutting instruments used for minimally invasive sinus surgery. The line
includes instruments with cutting tips at several different angles to allow for
convenient access to difficult-to-reach anatomy. The instruments' list prices
range from $225 to $850.

Irrigation and Suction System. Registrant manufactures and markets ClearESS(TM),
which provides convenient and effective irrigation and suction to remove blood
and debris for enhanced visualization during endoscopic sinus surgery. The
ClearESS kit, which includes suction and irrigation tubing, currently has a list
price per package ranging from $495 to $795.

Bipolar Microdebrider Sleeve. Registrant manufactures and markets
HemoSleeve(TM), a bipolar sleeve which fits over the surgeon's existing
microdebrider. HemoSleeve provides the surgeon with precise bipolar coagulation
which improves surgical efficiency and enhances visualization by reducing
inter-operative post-debrider bleeding. Registrant's HemoSleeve has a list price
of $295 for a package of five.


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Marketing

Registrant sells its Contact Laser Systems to end users by forming a responsive
partnership with surgeons and hospitals to develop and apply innovative
technologies that advance therapeutic benefit. Registrant's products are
designed to improve cost-effectiveness and enhance access and ease of use.
Registrant's marketing efforts include activities designed to educate physicians
and nurses in the use of Registrant's products.

Registrant's sales organization provides consultation and assistance to the
surgeon and surgical staff on the effective use of Registrant's products. The
consultative sales effort varies depending on many factors, which include the
nature of the specialty involved and complexity of the procedures and continues
throughout Registrant's long-term relationship with its customers. The length of
the sales cycle for a laser unit varies from one month to one year, with the
average sale requiring approximately six months.

Registrant's President and CEO supervises these sales and marketing activities
in the United States, which are conducted predominantly by Registrant-employed
sales personnel. The sale and post-sale support provided by Registrant includes
area managers who are trained in the utilization of Registrant's products, and
who provide clinical consultation regarding safety, efficacy and operating room
procedures; per diem support specialists, who provide similar consultation
within Registrant's Laser OnCall(TM) rental offering; and marketing and
technology personnel, who together provide the link between the surgeon and
Registrant to create innovative solutions and identify new applications and
product opportunities. In certain geographic areas of the United States,
Registrant utilizes distributors, whose employees are not Registrant's
employees, to provide these services. Registrant distributes its products
internationally through independent distributors.

Contract Development and Private Label Manufacturing. As part of Registrant's
efforts to refocus its business strategy, Registrant has sought and will
continue to seek to augment its sales to end-user customers by entering into
specific contract development and private label manufacturing agreements with
other manufacturers. These activities are designed to utilize Registrant's
product strengths and capabilities.

International Markets. During 1998, Registrant's international marketing
activities included working through distributors in various countries in Europe,
the Middle East, the Far East, South America, Mexico and Canada.

Research and Development

Registrant focuses its research and product development efforts on tissue effect
technologies that include laser and non-laser based technologies and improving
its offerings in ENT and Neurosurgery. Registrant's technological capabilities
are designed to be responsive to the surgeon's needs. Registrant has the ability
to respond to development requirements in the areas of optical/materials
technology, laser and electrosurgical technology and mechanical and electronics
technology. During 1998, 1997 and 1996, Registrant spent $1,179,000, $910,000
and $1,404,000 in product development expenses, respectively.

Registrant's facility in Montgomeryville, Pennsylvania houses its product
development activities. Registrant utilizes the technologies developed by
Advanced Laser Systems Technology, Inc. ("ALST") which was licensed to
Registrant in December 1990 in the development and manufacture of its CLMD laser
units. Registrant, in addition to its internal product development programs,
works closely with


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medical centers, universities and other companies worldwide in an effort to
develop additional products and applications.

Registrant's core Laser Probe and Laser Scalpel technology was acquired by
Registrant in 1985 in consideration for certain royalty payments on net sales of
probes and scalpels. The disposable fiberoptic delivery systems, with and
without hand-pieces, the disposable gas and fluid cartridge systems,
ceramic-enclosed probes, adjustable touch-control hand-pieces, ClearESS
irrigation and suction system and the HemoSleeve micro-debrider sleeve have been
developed by employees of Registrant; Registrant has retained ownership of all
such proprietary technology. Registrant's handheld sinus instrument line was
developed by an outside consultant and is manufactured by a domestic supplier.

Registrant continues to focus on applications in minimally invasive and open
surgery procedures where precision and hemostasis are critical to the procedure
being performed and where Registrant's products can demonstrate distinct
clinical advantages and cost-effectiveness relative to traditional surgical
methods.

Competition

Registrant faces substantial competition from other manufacturers of surgical
systems, whose identity varies depending on the medical application for which
the surgical system is being used, and from traditional surgical methods. Other
companies are developing competitive surgical systems and related technologies
and certain of these companies are substantially larger and have substantially
greater resources than Registrant. These efforts could result in additional
competitive pressures on Registrant's operations.

In addition, Registrant faces substantial competition in ENT and Neurosurgery
from well-established manufacturers of non-laser products. These
well-established companies have substantially greater resources than Registrant
and could exert considerable competitive pressure on Registrant.

Registrant continues to be aware that certain companies have introduced into the
market concepts or products that draw on Contact Laser technology. Registrant
does not perceive that such concepts or products have a significant impact on
Registrant's sales.

Registrant, through its patented Contact Laser Delivery Systems, is able to
produce a wide range of temperature gradients which address a broad range of
surgical procedures within multiple specialties. Registrant's multiple specialty
capability reduces a hospitals need to purchase several lasers to meet its
specialists' varied requirements. These factors, coupled with the precision,
hemostasis, tactile feedback and control provided by its Contact Laser Delivery
Systems, are Registrant's primary competitive strengths.

FDA and Related Matters

The FDA generally must approve the commercial sale of new medical devices.
Commercial sales of medical lasers must be preceded by either a premarket
notification filing pursuant to Section 510(k) of the Federal Food, Drug and
Cosmetic Act, or the granting of premarket approval for a particular medical
device.

The 510(k) notification filing must contain information that establishes that
the device in question is substantially equivalent to devices on the market.
Registrant has received FDA clearance to


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commercially market its Contact Laser System, including the laser unit, Laser
Probes and Laser Scalpels and Fiberoptic Delivery System, in a variety of
surgical specialties and procedures in gynecology, gastroenterology, urology,
pulmonology, general and plastic surgery, cardio-thoracic surgery, ENT surgery,
ophthalmology, neurosurgery and head and neck surgery. These clearances were
granted under Section 510(k) on the basis of substantial equivalence to other
laser or electrosurgical cutting devices that had received prior clearances or
were otherwise permitted to be used in such areas.

Registrant has also placed on the market several Class I, 510(k) exempt, ENT
products, including handheld surgical instruments and suction/irrigation
products (ClearESS). Additionally, Registrant has received 510(k) clearance for
HemoSleeve.

Registrant anticipates that most of its new products will also be eligible for
the Section 510(k) procedure, although some new products, such as products for
which there are few substantially equivalent devices or uses, may be subject to
a lengthier review process. There can be no assurance that any future FDA
clearances will be granted on a timely basis, if at all. Failure to obtain FDA
clearance or extensive delay in the FDA clearance process for any new product
which represents a significant development for Registrant would likely have a
material adverse effect on Registrant's business.

Following FDA clearance for commercial distribution, the primary form of
government regulation of medical products is the Quality System Regulations for
medical devices. These regulations, administered by the FDA, set forth
requirements to be observed in the design, manufacture, storage, quality control
procedures and installation of medical products for human use. In addition,
there are a variety of registration and reporting requirements with which
Registrant must comply.

Registrant is also subject to the regulations under the Radiation Control for
Health and Safety Act (1968) of the Center for Devices and Radiological Health
("CDRH") of the FDA. These regulations require laser manufacturers to file new
product and annual reports, to maintain quality control, product testing and
sales records, to incorporate certain design and operating features in lasers
sold to end-users and to certify and label each laser sold as belonging to one
of four classes, based on the level of radiation from the laser that is
accessible to users. Various warning labels must be affixed and certain
protective devices installed, depending on the class of the product. CDRH is
empowered to seek fines and other remedies for violations of the regulatory
requirements. To date, Registrant has filed the documentation with CDRH for its
laser products requiring such filing, and has not experienced any difficulties
or incurred significant costs in complying with such regulations.

In addition, federal law requires Medicare to establish guidelines for hospital
reimbursement based on patient diagnosis ("Diagnostic Related Group" or "DRG").
Once a diagnosis is made, the payment to the hospital will be fixed irrespective
of the length of the hospital stay, the method of treatment, the supplies used
or the tests carried out. This provides the hospital with an incentive to adopt
cost reduction methods. Registrant believes that the Contact Laser System may
reduce costs to hospitals by reducing length of stay due primarily to the
reduced need for invasive surgery, general anesthesia or related medical
treatments.

The FDA and other governmental agencies, both in the United States and in
foreign countries, may adopt additional rules and regulations that may affect
Registrant and its products.



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Patents

Registrant's patents offer significant protection to the differentiation of
Registrant's Contact Laser Delivery Systems from competitors' products.
Registrant has sought and enjoys such protection principally in the United
States. As of January 3, 1999, Registrant had fourteen patents issued by the
U.S. Patent and Trademark Office which generally expire 17 years from the
following respective dates of issuance: September 15, 1987 (laser scalpels);
April 12, 1988 (coatings); November 22, 1988 (two-piece disposable laser
delivery system); April 18, 1989 (laser probes and scalpels); January 23, 1990
(supply system for sterile fluids and gases); January 23, 1990 (two-piece
disposable laser delivery system); October 13, 1992 (unitary scalpel); June 22,
1993 (adjustable touch control hand-piece); January 10, 1995 (contact or
insertion laser probe having wide angle radiation); May 16, 1995 (fused tip and
fiber); May 28, 1996 (probe with inclusions); March 4, 1997 (surgical tool for
use with Contact Laser); September 5, 1998 ( a continuation of surgical laser
tool issued March 4, 1997); and November 10, 1998 (laterally-emitting laser
devices). Registrant has several other patents pending before the U.S. Patent
and Trademark Office, as well as other patents and pending applications
overseas.

Registrant has also begun to establish a proprietary position for its new
products. Registrant has filed patent applications with the U.S. Patent and
Trademark Office for its HemoSleeve(TM) and ClearESS(TM) products and
anticipates that applications will be filed for other new products

Registrant intends to continue its policy of defending vigorously the ownership
and protection of its proprietary technology against significant encroachments.
However, no assurance can be given that such policy will be successful. (see
Part I, Item 3, Legal Proceedings).

Many of Registrant's products and services are offered under trademarks and
service marks, both registered and unregistered. Registrant believes its
trademarks encourage customer loyalty and aid in the differentiation of
Registrant's products from competitors' products. Accordingly, Registrant has
registered seven of its trademarks with the U.S. Patent and Trademark Office. It
has filed its intent to register other trademarks, principally in areas outside
of Contact Laser(TM) surgery. Registrant has other registrations issued or
pending abroad.

Employees

As of January 3, 1999, Registrant had 68 employees of whom 30 were engaged in
manufacturing, service and operations, 8 in research and product development, 20
in sales, marketing and customer service and 10 in general administration.
Registrant's employees are not represented by a union. Registrant considers its
relations with employees to be good.

(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
    SALES.

In addition to Registrant's domestic sales, Registrant currently sells its
products internationally through distributors in Western Europe, Canada, the
Middle East, the Far East and South America. During fiscal 1998, 1997 and 1996,
domestic sales represented 87%, 84% and 77% respectively, of Registrant's total
sales. All export sales are transacted in U.S. currency.


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Item 2. Properties.

Registrant owns approximately four acres in Oaks, Pennsylvania on which a 57,000
square foot office building is located. On November 25, 1998, Registrant and the
current lessee entered into an agreement of sale for the facility and are
currently soliciting the consent of the mortgage lenders. It is anticipated that
the lessee will assume the two mortgages discussed below. Closing is expected to
occur before the end of June 1999. Registrant originally leased this property to
the lessee under a three year lease, which included an option to purchase the
property, dated March 21, 1996, as later amended on June 14, 1996. The lessee
began occupying the facility in June 1996.

The mortgages expected to be assumed by the purchaser are a first mortgage debt
in favor of American United Life Insurance Corporation ("AULIC"), and a second
mortgage held by Montgomery County Industrial Development Corporation ("MCIDC")
on behalf of Pennsylvania Industrial Development Authority ("PIDA"). The balance
of the first mortgage debt at January 3, 1999 was $2,865,000. The loan bears
interest at 10.5% per year and is being repaid in equal monthly payments,
including interest, of approximately $34,000 over 20 years. The balance of the
second mortgage debt at January 3, 1999 was $1,178,000. The loan bears interest
at 3% per year and is being repaid in equal monthly payments, including
interest, of approximately $14,000 over 15 years.

As a condition to the second mortgage, Registrant is required to hold collateral
in favor of MCIDC, the terms of which will extend until Registrant has had four
consecutive profitable calendar quarters. At January 3, 1999, the required
amount of this security was $589,000; the form of the collateral was a standby
letter of credit of $389,000 with the remainder covered by a first security
interest in certain fixed assets and a second security interest in Registrant's
accounts receivable and inventories. This requirement will be eliminated upon
the assumption of the mortgage by the lessee.

Registrant currently leases a 42,000 sq. ft. facility in Montgomeryville,
Pennsylvania that houses all of its administrative and manufacturing operations.
Registrant entered a five-year lease for the Montgomeryville facility on May 29,
1996. Registrant has leased on a month-to-month basis approximately 5,000 sq.ft.
of space close to its new facility, but will terminate the short-term lease by
the end of the first quarter 1999.

Registrant also holds a lease on its former manufacturing facility in Hebron,
Kentucky. The facility comprises 32,000 sq. ft. and is under lease through
August 2000. Since the operations from this facility were transferred during
1992 to Pennsylvania, Registrant sought to sublet the facility. A subtenant for
19,500 sq. ft. of the facility was secured in April 1994; a subtenant for the
balance of the space was secured in August 1996. In 1997, the first subtenant
went out of business. Registrant secured a replacement subtenant, but in January
1999, the replacement subtenant abandoned the sub-let premises and the sublease.
Registrant is currently seeking to find a further replacement subtenant. There
can be no assurance that Registrant will succeed in finding a replacement
subtenant or, if successful, that Registrant will succeed in keeping the
subtenants at the facility through August 2000. Should Registrant be
unsuccessful in obtaining a new subtenant for the 19,500 sq. ft., Registrant
will incur an expense of approximately $75,000 which represents the remaining
lease payments from the subtenent.

Item 3. Legal Proceedings.

Trimedyne. In January 1995, Trimedyne, Inc. filed a patent infringement action
against Registrant. The suit was brought in the United States District Court for
the Central District of California. Trimedyne had alleged that various products
of Registrant infringed certain patents belonging to Trimedyne.

                                       10
<PAGE>

On July 11, 1996, the court entered a final judgment in favor of Registrant,
dismissing Trimedyne's complaint. Trimedyne filed a motion for the court to
reconsider its judgment. On August 7, 1996, the court denied Trimedyne's motion.
On September 3, 1996, Trimedyne appealed from the lower court's judgment with
respect to two of the patents at suit. On July 10, 1998, the Court of Appeals
affirmed the lower court's ruling with respect to the patent concerning contact
products, and reversed and remanded the decision with respect to a patent
potentially covering one free-beam probe produced and sold by Registrant,
holding that there were triable issues of fact. Although Registrant believes
that the product in question is not violating the Trimedyne patent, in January
1999, Registrant entered into settlement discussions with Trimedyne in an effort
to avoid the time and cost of a trial.

Item 4. Submission of Matters to a Vote of Security Holders.

Registrant held a Special Meeting of Stockholders on December 18, 1998. The
stockholders approved an amendment of Registrant's Restated Certificate of
Incorporation to effect a one-for-five reverse split of the shares of
Registrant's Common Stock. The reverse split was approved with 8,233,980 votes
in favor, 668,356 votes opposing and 23,877 votes abstaining. Registrant
effected the one-for-five reverse split by amendment to its Restated Certificate
of Incorporation on January 8, 1999.


                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Registrant's Common Stock, $.0l par value, is quoted on the Nasdaq Stock Market
under the symbol "SLTI." Until January 14, 1999, Registrant's Common Stock was
quoted on the Nasdaq National Market. Since January 15, 1999, Registrant's
Common Stock has been traded on the Nasdaq SmallCap Market. As of March 15,
1999, there were approximately 574 record holders of Registrant's Common Stock.
On March 15, 1999, the closing price of Registrant's Common Stock on the Nasdaq
Stock Market was $1.75 per share. The following table sets forth the high and
low sales prices, restated for the effect of the one-for-five reverse split on
January 8, 1999, for Registrant's Common Stock for each quarterly period within
the two most recent fiscal years.

1998                                                   High      Low
                                                       ----      ---
            First Quarter                             $9.53    $5.63
            Second Quarter                             6.88     3.44
            Third Quarter                              5.63     2.50
            Fourth Quarter                             3.75     1.25

1997                                                    High     Low
                                                        ----     ---
            First Quarter                              $8.15   $5.30
            Second Quarter                              7.80    5.30
            Third Quarter                              10.30    5.95
            Fourth Quarter                             14.40    6.25

Registrant has never paid any cash dividends on its Common Stock and does not
expect to pay cash dividends in the foreseeable future. Registrant's bank line
of credit agreement prohibits the declaration or payment of any dividends or
distributions on any shares of its capital stock without the bank's prior
written consent at any time there are outstanding obligations to the bank.


                                       11
<PAGE>

Item 6. Selected Consolidated Financial Data.

The following table summarizes certain selected financial data for the five
years ended January 3, 1999. The selected financial data for Registrant at
January 3, 1999 and December 28, 1997 and for each of the three years in the
period ended January 3, 1999 are derived from, and are qualified by reference
to, the financial statements of Registrant, which are included elsewhere in this
report. Such financial statements have been audited by Arthur Andersen LLP,
independent public accountants, to the extent indicated in their report. The
selected financial data for Registrant at December 29, 1996, December 31, 1995
and January 1, 1995, and for each of the two years in the period ended December
31, 1995, are derived from the audited financial statements of Registrant not
included herein. This data should be read in conjunction with Registrant's
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report.



                                       12
<PAGE>

<TABLE>
<CAPTION>
                                                         1998           1997         1996        1995       1994
                                                         ----           ----         ----        ----       ----
                                                                      (In thousands, except per share)
<S>                                                     <C>          <C>           <C>          <C>          <C>    
Statement of Operations Data:
Net sales                                               $9,393       $11,665       $10,974      $14,839      $21,508
Gross profit                                             4,927         6,893         6,912        8,702       13,494
    Percentage of sales                                   52.5%         59.1%         63.0%        58.6%        62.7%

Selling, general and administrative expenses            $5,944        $6,613        $8,072      $10,047      $10,786
Product development expenses                             1,179           910         1,404        2,143        2,068
Non-recurring charges (credits)                            485(1)       (177)(1)     1,504(1)     1,915(2)      (892)(4)
Net gain on settlement of patent litigation                 --            --            --       (5,926)(3)       --
Operating income (loss)                                 (2,681)         (453)       (4,068)         523        1,532
Net income (loss)                                       (2,552)         (381)       (4,508)         (58)         913
Basic and diluted earnings (loss) per share (5)(6)      ($1.29)       ($0.19)       ($2.28)      ($0.03)       $0.50

Shares used in calculation of basic and diluted
   earnings (loss) per share (5)                         1,978         1,977         1,973        1,970        1,842

Balance Sheet Data:
Cash, cash equivalents and short-term investments       $6,023        $6,549        $6,120       $8,147       $4,143
Accounts receivable, net                                 1,437         1,925         2,899        3,225        4,468
Inventories                                              2,540         2,986         3,534        3,866        4,725
Total assets                                            16,648        19,996        21,490       24,821       26,454
Long-term debt                                           3,965         4,509         4,971        4,503        4,719
Convertible subordinated debentures                      1,624         1,633         1,660        1,786        1,848
Stockholders' equity                                    $8,594       $11,357       $11,308      $15,690      $15,685
====================================================================================================================
</TABLE>

(1)  See Note 12 of Notes to Consolidated Financial Statements.

(2)  Write-down of certain fiber inventory and intangible assets and costs
     associated with workforce reductions.

(3)  Net settlement of lawsuit with Laser Industries Ltd. and its subsidiary
     Sharplan Lasers, Inc.

(4)  Settlement of lawsuit with ALST partially offset by a separate legal
     settlement with a former distributor.

(5)  Restated for the effect of the one-for-five reverse Common Stock split
     implemented on January 8, 1999.

(6)  The inclusion of common share equivalents had an anti-dilutive effect when
     calculating diluted earnings (loss) per share, and, as a result, diluted
     earnings (loss) per share was equivalent to basic earnings (loss) per share
     for each period presented.

No cash dividends were declared during any of the periods presented.

The accompanying Consolidated Financial Statements and Notes thereto are an
integral part of this information.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

Net Sales

Registrant's net sales of Contact Laser(TM) Systems are primarily comprised of
Contact Laser Delivery Systems and related accessories and Nd:YAG Laser Systems.
The U.S market is serviced predominantly by a direct sales force, while sales
outside the United States are derived through a network of distributors. In
1998, net sales were $9,393,000, a decrease of $2,272,000, or 19%, from 1997
sales of $11,665,000. The 1997 sales of $11,665,000 increased $691,000, or 6%
from 1996 sales of $10,974,000.

                                       13
<PAGE>

Net sales of Contact Laser Delivery Systems and related accessories, which
comprised 71% of Registrant's net sales in 1998, declined 10% and 12% in 1998
and 1997, respectively, due to the lower level of sales of Nd:YAG laser systems
and to lower sales primarily within the urology market, offsetting increases in
sales within the ENT and neurosurgical markets where Registrant is currently
concentrating its sales efforts.

Net sales of Nd:YAG laser systems, which comprised 10% of Registrant's net sales
in 1998, decreased by 59% on a 63% decline in units. The decrease in laser
system sales was attributable to both domestic hospital budget constraints and
to the effect of the Asian economic situation which rendered certain
distributors unable to secure funding for planned purchases. In 1998, the
overall average unit selling price of an Nd:YAG laser system remained consistant
as compared to 1997.

Net sales of Nd:YAG laser systems in 1997 was relatively constant with 1996,
despite an increase of 34% in unit sales. Unit sales of new Nd:YAG laser systems
in 1997 remained relatively constant with 1996, while sales of used and
demonstration laser systems accounted for the percentage increase in unit sales.
The increase in unit sales was due to both a higher volume of sales of
Registrant's laser systems for ENT surgery as well as Registrant's continuing
efforts to reduce demonstration laser inventory levels through a reduction in
average unit prices. As a result, in 1997 the overall average unit selling price
of an Nd:YAG laser system declined by 24% as compared to 1996.

In October 1996, following the acquisition of the remaining 50% interest in the
Mediq PRN/SLT joint venture (see Note 5 of Notes to Consolidated Financial
Statements), revenues from the rental of Registrant's Nd:YAG laser systems and
related Contact Laser Delivery Systems and accessories began to be included in
net sales. In 1998 and 1997, respectively, rental revenue accounted for 10% and
9% of net sales.

All other revenue, including contract development activities, accounted for 9%
of net sales in 1998 and 1997. There were no contract development activities in
1996.

Management will continue to invest in innovative product development and will
continue to develop and expand its strategic business relationships while
actively pursuing business combination or acquisition opportunities aimed at
enhancing the generation of new revenues and increasing shareholder value.

Gross Profit

Gross profit for the year ended January 3, 1999 decreased $1,966,000 or 29% from
the prior year. As a percentage of net sales, gross profit was 52%, down from
59% in 1997. The decrease in gross profit as a percentage of net sales resulted
from the inclusion in 1997 of initial contract development fees with no direct
cost for which there were no comparable fees in 1998.

Gross profit for the year ended December 28, 1997 was constant with the prior
year on a 6% increase in net sales. As a percentage of net sales, gross profit
was 59%, down from 63% in 1996. The decrease in gross profit as a percentage of
sales was due primarily to three factors. The main factor was a reduction in the
selling price on certain Contact Laser Systems, enacted in an effort to reduce
inventory levels. The second factor was the inclusion in all of 1997 of the
Laser OnCall(TM) rental business which operated at a lower percentage gross
profit as compared to the sale of lasers and delivery systems. A partial offset
to those two factors was the higher percentage gross profit realized from
contract development activities in 1997 for which there were no corresponding
activities in 1996.

                                       14
<PAGE>

Operating Expenses

Selling, general and administrative expenses were $5,944,000 in 1998, compared
to $6,613,000 in 1997, a decrease of 10%. The comparative decrease was due
primarily to significantly lower legal fees in 1998 due to the settlement in
1997 of two outstanding lawsuits. In 1998, Registrant continued to reduce
operating expenses where appropriate relative to the lower level of net sales
being experienced. Management expects to continue to monitor expense levels
throughout 1999, making adjustments where warranted.

Selling, general and administrative expenses in 1997 decreased 18% from the 1996
level of $8,072,000 due mainly to cost reduction actions taken in the third
quarter of 1996. Such actions included reductions in workforce and related
employee expenses and a reduction in the operating costs due to the
consolidation of Registrant's facilities into one location. Also contributing to
the decrease was a reduction in legal fees.

Product Development

Product development costs were $1,179,000, $910,000, and $1,404,000 in 1998,
1997 and 1996, respectively. The increase in 1998 versus 1997 was due
principally to increased manpower and other expenditures associated with
Registrant's private label and ENT and Neurosurgery product development efforts.

Non-Recurring Charges (Credits)

In 1998, Registrant recorded a non-recurring charge related to the impending
sale of SLT's former headquarters facility in Oaks, Pennsylvania, which is
expected to close before the end of June 1999. The charge consisted of a
$325,000 write-down of the asset necessitated by the terms of the impending sale
and $160,000 in accrued closing costs.

In 1997, Registrant recorded a benefit from the settlement of litigation with
C.R. Bard and the Bard Urological Division of $1,000,000. In addition,
Registrant recorded non-recurring facility-related charges of $542,000 related
to Registrant's former headquarters facility and $281,000 related to
Registrant's former manufacturing facility in Kentucky. The $542,000 charge
resulted from a write-down in the carrying value of the former headquarters
facility necessitated by the terms under which the facility was expected to be
sold at the end of the tenant's initial sublease term. The $281,000 charge
resulted from the loss of Registrant's former subtenant and subsequent signing
of a new subtenant at a lower rental rate.

In 1996, Registrant recorded non-recurring charges of $1,504,000, representing
third quarter restructuring charges of $1,201,000 for severance and other
related costs, and a charge of $303,000 for the write-off of leasehold
improvements at Registrant's former leased manufacturing facility in Oaks,
Pennsylvania. The manufacturing operations have been consolidated with all other
operations into Registrant's leased facility in Montgomeryville, Pennsylvania.

Other Income

Other income primarily consisted of facility-related income and expense items.
Other income was $407,000 in 1998 and $366,000 in 1997, an increase of $41,000.
In 1997, other income increased to $366,000 from a loss in 1996 of $23,000. This
increase resulted from the inclusion of a full year of


                                       15
<PAGE>

sublease income in 1997 as compared to only six months of sublease income in
1996 and the inclusion of a charge to other income in 1996 of moving expenses to
relocate Registrant's headquarters for which there were no corresponding costs
in 1997.

Interest

Net interest expense in 1998 of $275,000 was relatively constant with net
interest expense of $282,000 in 1997. Net interest expense of $282,000 in 1997
increased by $29,000 from $253,000 in 1996. The increase was due to the
inclusion of a full year of interest expense on the capital leases acquired in
the purchase of the Mediq PRN/SLT joint venture offset in part by higher
interest income earned on cash, cash equivalents and short-term investments in
1997.

Income Taxes

The tax provision in 1998 and 1997 of $3,000 and $12,000 respectively, was for
state income taxes. There was no provision for income taxes in 1996 due to the
net taxable loss incurred. Registrant expects that its effective tax rate for
1999 will remain significantly lower than the statutory rate due to continued
availability of its net operating loss carryforwards and tax credit
carryforwards.

MedTREK Agreement

In 1997, Registrant acquired exclusive worldwide rights to certain new products
and medical devices used in minimally invasive otolaryngology and head and neck
(ENT) surgery, pursuant to an agreement with MedTREK Corporation and its
President, Mr. Dom L. Gatto. In accordance with the terms of the agreement,
Registrant was required to make cash payments to MedTREK when certain products
were commercially introduced and has issued stock warrants to MedTREK that will
vest when and if predetermined revenue targets are achieved. During 1998, SLT
concluded that certain products under the agreement would not be commercialized.
As a result, the net value of the agreement and any remaining liabilities
associated with these products were written-off in December 1998. Also, since
these products will not be commercialized, it is improbable that the
predetermined revenue targets necessary to vest the warrants will be achieved.
Therefore, in December 1998, SLT wrote-off the value of the warrants (see Note 7
of Notes to Consolidated Financial Statements).

Liquidity and Capital Resources

Cash, cash equivalents and short-term investments at January 3, 1999 were
$6,023,000, a decrease of $526,000 over the December 28, 1997 balance of
$6,549,000. Registrant invests its excess cash in high- quality, liquid,
short-term investments. In each of the two years, $100,000 was restricted and
pledged in favor of American United Life Insurance Company ("AULIC") as a
condition of the first mortgage with AULIC (see Note 10 of Notes to Consolidated
Financial Statements). At January 3, 1999 and December 28, 1997, letters of
credit, issued under Registrant's bank line of credit, were outstanding in favor
of the Montgomery County Industrial Development Corporation ("MCIDC") as a
condition of the security agreement with MCIDC (see Note 10 of Notes to
Consolidated Financial Statements). The letters of credit amounted to $389,000
and $453,000 at the end of 1998 and 1997, respectively. The letter of credit
requirement and the restricted cash requirement are expected to be eliminated
with the sale of the facility.

Registrant has a $2,535,000 credit facility with a bank. This facility includes
a sub-line for letters of credit of $535,000, under which the aforementioned
letters of credit were issued. Other than the letter of credit requirement by
MCIDC, and one other minor letter of credit, there were no borrowings under the

                                       16
<PAGE>

credit facility during 1998 or 1997. Borrowings under the credit facility are
secured by Registrant's accounts receivable and inventories. The credit facility
is subject to Registrant maintaining certain financial covenants as defined.
Management expects to renew a line of credit facility when this facility expires
on May 31, 1999.

In 1998, net cash provided by operating activities was $117,000, which resulted
principally from losses incurred of $2,552,000 offset by net non-cash
adjustments of $1,515,000 and a decrease in accounts receivable and inventory of
$488,000 and $588,000, respectively. The net non-cash adjustments of $1,515,000
included non-recurring charges of $485,000. Net cash provided by operating
activities was $987,000 in 1997, primarily resulting from net non-cash
adjustments of $1,917,000, a decrease in accounts receivable of $974,000,
partially offset by the net loss incurred of $381,000 coupled with a decrease in
accounts payable and accrued liabilities of $1,500,000. The net non-cash
adjustments of $1,917,000 included non-recurring charges of $847,000. The
decrease in accounts payable and accrued liabilities included royalty payments
of $391,000 to Norio Daikuzono in connection with the settlement of litigation.

Net cash provided by investing activities was $1,741,000 in 1998 compared to
cash used in investing activities of $1,972,000 in 1997. The increase was
principally due to the maturity of certain short-term investments of $1,909,000
during 1998 compared to the purchase of certain short-term investments of
$1,669,000 during 1997.

Net cash used in financing activities was $475,000 in 1998, compared to net cash
used in financing activities of $255,000 in 1997. The increase was principally
the result of stock warrants issued in 1997 of $171,000, of which there was no
comparable issuance in 1998.

Management believes that Registrant's current cash position and available line
of credit will be sufficient to fund operations and meet its commitments for
long-term debt (see Note 10 of Notes to Consolidated Financial Statements),
other commitments and contingencies (see Note 17 of Notes to Consolidated
Financial Statements) and capital expenditures. In July 1999, Registrant's 8%
Subordinated Convertible Debentures will mature. Management believes that its
cash position will be sufficient to meet this obligation.

Management believes that inflation has not had a material effect on operations
for the three years in the period ended January 3, 1999.

Year 2000 Compliance

Registrant has analyzed its information technology systems for the "Year 2000"
compliance issues. Management believes that the "Year 2000" issue related to
Registrant's hardware and software programs are not likely to result in any
material adverse disruptions in Registrant's computer systems or its internal
business operations. Registrant has purchased the latest version of its
operating software package to provide remediation for the "Year 2000" issue. The
costs of this new software was $8,000 and testing and implementation is to be
completed by the third quarter of 1999.

Registrant has analyzed and determined that the "Year 2000" issue related to its
non-information technology, such as its telephone and security system, are not
likely to result in any material disruption of it business operations.

                                       17
<PAGE>

Registrant is currently in the process of evaluating its relationships with
third parties, such as banks, service providers and suppliers, with which
Registrant has a direct and material relationship to determine whether they are
"Year 2000" compliant. The responses received to date from such third parties to
inquiries made by Registrant indicate that these third parties either are or
expect to be compliant by the Year 2000.

Even assuming that all material third parties confirm that they are or expect to
be "Year 2000" compliant by December 31, 1999, it is not possible to state with
certainty that such parties will be so compliant, or that the operations of such
third parties will not be materially impacted by other parties with whom they
themselves have a material relationship, and who fail to timely become "Year
2000" compliant. Consequently, it is not possible to predict whether or to what
extent the "Year 2000" issues may have an adverse material impact on Registrant
as a result of their impact on the operations of the third parties with whom
Registrant has a material relationship. For example, the failure to be "Year
2000" compliant by a bank with whom Registrant has a material banking
relationship could cause significant disruption in Registrant's ability to make
payments, deposit funds and make investments, which could have a material
adverse effect on Registrant's financial condition.

Registrant has not established a contingency plan in case of failure of its
information technology systems since it expects to have its new software system
in place by the third quarter of 1999. Registrant will continuously monitor its
relationships with banks, service providers and suppliers to ensure they expect
to be "Year 2000" compliant. If Registrant learns that one of these third
parties will not be "Year 2000" compliant, Registrant's contingency plan would
include replacing such third party.

Risk Factors

The statements contained in this Form 10-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the expectations, beliefs, intentions or strategies
regarding the future. Additionally, from time to time, Registrant or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forward-looking statements may be included in, but are not limited
to, press releases, oral statements made with the approval of an authorized
executive officer or in various filings made by Registrant with the Securities
and Exchange Commission. These forward-looking statements reflect Registrant's
views as of the date they are made with respect to future events and financial
performance and are generally, but not exclusively, identified by the use of
such terms as "intends," "expects," "plans," "projects," "estimates,"
"anticipates," "should" and "believes." However, these forward-looking
statements are subject to many uncertainties and risks which could cause the
actual results of Registrant to differ materially from any future results
expressed or implied by such statements. Additionally, Registrant does not
undertake any obligation to update any forward-looking statements.

The risk factors identified in the cautionary statements below could cause
actual results to differ materially from those suggested in these
forward-looking statements. Also, Registrant may, from time to time, set forth
additional risk factors on Forms 10-Q and 8-K. However, the risk factors listed
below or in future reports of Registrant are not exhaustive. New risk factors
emerge from time to time, and it is not possible for management to predict all
of such risk factors, nor can it assess the impact of all of such risk factors
on Registrant's business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements. Accordingly, forward-looking statements should
not be relied upon as a prediction of actual results. The cautionary statements
below are being made pursuant to the "safe-harbor" provisions of the Private

                                       18
<PAGE>

Securities Litigation Reform Act of 1995 (the "Act"). Registrant intends that
all forward-looking statements made, in whatever form, be considered subject to
the Act.

Changes in the U.S. Health Care System. There has been substantial debate in the
political arena related to prospective changes in the U.S. health care system.
In addition, developments in both the public and the private sector have
significantly affected the financing and delivery of health care in the United
States, including the rapid expansion of managed care programs, the reduction of
reimbursements under the capital cost pass through system for the Medicare
program and the implementation of prospective governmental reimbursement
programs based on diagnostic related groups. Cost containment has been a major
element of these developments, which have had a material adverse effect on
Registrant's results of operations over the past several years. There can be no
assurance that such changes in the financing and delivery of health care will
not continue to affect hospital capital equipment and supplies procurement
patterns or dictate which surgical procedures will be covered by applicable
insurance or government funded or subsidized programs, which could continue to
have a material adverse impact on Registrant. Registrant also cannot predict the
extent or impact of future legislation or regulations.

Competition. Registrant faces substantial competition from conventional surgical
methods, from other manufacturers of surgical lasers and from manufacturers of
alternatives to surgical lasers. Competitive pressure could result in price
competition or the introduction of new products by Registrant's competitors,
which could have an adverse impact on Registrant's revenues and results of
operations. In addition, Registrant is engaged in an industry characterized by
extensive research efforts. Advances in medical lasers which improve clinical
effectiveness and other discoveries or developments in either the medical device
or drug industry could render Registrant's products obsolete. Some of the
companies with which Registrant competes or may compete in the future have or
may have more extensive research, marketing and manufacturing capabilities and
significantly greater financial, technical and personnel resources than
Registrant and may be better positioned to continue to improve their technology
in order to compete in an evolving industry.

Governmental Regulation. Government regulation in the U.S. and other countries
is a significant factor in the development, manufacturing and marketing of many
of Registrant's products and in Registrant's ongoing research and development
activities. Specifically, medical devices are subject to United States Food and
Drug Administration ("FDA") approval or clearance before they can be utilized
for clinical studies or sold commercially. The process for obtaining the
necessary approvals and compliance with applicable regulations can be costly and
time-consuming. There can be no assurance that regulatory review will not
involve delays or other actions adversely affecting the marketing and sales of
Registrant's products. Registrant has received all of its FDA clearances to date
using the procedure under Section 510(k). There is no assurance Registrant will
continue to be able to obtain applicable government approvals or successfully
comply with such regulations in a timely and cost-effective manner, if at all,
and failure to do so may have an adverse effect on Registrant's financial
condition and results of operation. Further, there can be no assurances that
more stringent regulatory requirements and/or safety and quality standards will
not be issued in the future with an adverse effect on Registrant's business.
Although Registrant believes that it is in compliance with all applicable
regulations of the FDA, current regulations depend heavily on administrative
interpretation and there can be no assurance that future interpretations made by
the FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect Registrant.

Registrant's products are similarly subject to foreign regulating bodies.
Typically, foreign bodies readily allow Registrant's products to be traded
within their jurisdictions, based on the fact that Registrant's products have
secured clearance from the FDA. However, there can be no assurance that such
foreign


                                       19
<PAGE>

bodies will not impose different, additional requirements that may materially
hamper Registrant's ability to compete in overseas markets.

Patents and Proprietary Technologies. Registrant's ability to compete
effectively with other companies depends, in part, on its ability to protect and
maintain the proprietary nature of its technology. Registrant owns fourteen
United States patents, several Japanese patents and a number of issued foreign
patents and pending patent applications for its products. Registrant treats its
design and technical data as confidential, and relies on nondisclosure
safeguards, such as confidentiality agreements, laws protecting trade secrets
and agreements to protect proprietary information. Registrant has incurred
substantial costs in enforcing its patents against infringement by others and
defending itself against similar claims of others. Although Registrant has been
successful to date in disputes involving the validity and enforceability of its
patents and in defending itself against claims by others of patent infringement,
there can be no assurance that Registrant will continue to be successful in such
matters in the future or that Registrant's patents or other proprietary rights,
even if continuing to be held valid, will be broad enough in scope to enable
Registrant to prevent third parties from producing products using similar
technologies or processes.

As Registrant attempts to broaden its offerings in ENT and, to a lesser extent,
in other surgical fields, Registrant perceives that it may be obliged to license
technology from third parties in order to have competitive offerings. There can
be no assurance that Registrant will be successful in obtaining such licenses on
terms satisfactory to Registrant.

Product Development and Acquisitions. Registrant is actively engaged in
identifying market needs and in developing products to satisfy those unmet
needs. Such products are not necessarily laser products. Registrant attempts to
validate the existence of such unmet needs as well as the potential revenues,
costs and profits involved in satisfying such needs. There is a material risk
that Registrant's competitors may satisfy those needs with more effective or
less expensive products. There is also a material risk that Registrant's
estimates of the economic potential from such unmet needs may be incomplete or
inaccurate, or that the products which Registrant develops to meet such needs
will be untimely introduced or insufficiently effective clinically or
economically to gain market acceptance.

Registrant seeks to expand its product offerings through both internal
development and acquisition of products and/or companies. No assurance can be
given that Registrant will be successful in carrying out an acquisition strategy
or that if an acquisition is made that the acquisition will be successfully
integrated and result in increased revenues and profits.

Change in Marketing Approach. Registrant is taking, or is contemplating taking,
certain actions to transition its marketing approach from addressing a wide
range of surgical specialties to providing a broader array of products to a more
select market segment. Although Registrant believes that this transition will
have a long-term positive financial impact, no assurance can be given that the
actions taken will provide the intended results, or that Registrant will not
experience short-term disruptions or an adverse impact of operations during the
transition to this new marketing approach.

Nasdaq Listing Requirements. Registrant's Common Stock is traded on the Nasdaq
SmallCap market. In 1997, Nasdaq modified its listing requirements with which
Registrant was required to comply in order to remain listed on the Nasdaq Stock
Market. In January 1999, Registrant requested and received Nasdaq's approval to
move the market in which the Common Stock is traded from the Nasdaq National
Market to the Nasdaq SmallCap Market, due primarily to the Registrant's
inability to satisfy the minimum public float requirement for the Nasdaq
National Market. Although Registrant's stock price has remained above Nasdaq's
$1.00 minimum bid requirement since the one-for-five reverse split of the Common
Stock was


                                       20
<PAGE>

implemented in January 1999, no assurance can be given that the bid price of
Registrant's Common Stock will remain above the $1.00 minimum, or that
Registrant will continue to meet the other listing requirements required by the
Nasdaq SmallCap Market.

Item 8. Financial Statements and Supplementary Data.

                                                                           Page
                                                                           ----

Report of Independent Public Accountants..................................  22
Consolidated Balance Sheets at January 3, 1999
    and December 28, 1997.................................................  23
Consolidated Statements of Operations for each
    of the three years in the period ended
    January 3, 1999.......................................................  24
Consolidated Statements of Stockholders' Equity
    for each of the three years in the period ended
    January 3, 1999.......................................................  25
Consolidated Statements of Cash Flows for each of
    the three years in the period ended
    January 3, 1999.......................................................  26
Notes to Consolidated Financial Statements................................  27
Schedule II - Valuation and Qualifying Accounts...........................  44


All other schedules are omitted because of the absence of conditions under which
they are required or because the required information is included in the
Consolidated Financial Statements or Notes thereto.



                                       21
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Surgical Laser Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Surgical Laser
Technologies, Inc. (a Delaware corporation) and Subsidiaries as of January 3,
1999 and December 28, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended January 3, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Surgical Laser Technologies,
Inc. and Subsidiaries as of January 3, 1999 and December 28, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended January 3, 1999 in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule included in Item 8 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

                                                     ARTHUR ANDERSEN LLP



Philadelphia, PA
January 22, 1999


                                       22
<PAGE>

Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except for par values)
<TABLE>
<CAPTION>
                                                                   Jan. 3, 1999   Dec. 28, 1997
<S>                                                                   <C>            <C>     
Assets
Current assets:
     Cash and cash equivalents (Note 1)                               $  2,938       $  1,555
      (including restricted amounts of $100)
     Short-term investments (Note 1)                                     3,085          4,994
     Accounts receivable, net of allowance for doubtful accounts
      of $138 and $155                                                   1,437          1,925
     Inventories (Note 2)                                                2,540          2,986
     Other                                                                 437            445
                                                                      --------       --------
              Total current assets                                      10,437         11,905
Property and equipment, net (Note 3)                                     1,191          1,998
Property held for sale, net (Note 3)                                     4,339          4,869
Patents and licensed technology, net (Note 4)                              544            576
Other assets                                                               137            648
                                                                      --------       --------
              Total assets                                            $ 16,648       $ 19,996
                                                                      ========       ========

Liabilities and Stockholders' Equity
Current liabilities:
     Current portion of long-term debt                                $  2,196       $    504
     Accounts payable                                                      763            512
     Accrued liabilities (Note 9)                                        1,130          1,481
                                                                      --------       --------
              Total current liabilities                                  4,089          2,497
                                                                      --------       --------
Long-term debt (Note 10)                                                 3,965          6,142
                                                                      --------       --------

Commitments and Contingencies (Note 17)

Stockholders' equity:
     Common stock, $.01 par value, 30,000 shares authorized,
       1,978 shares and 1,977 shares issued and outstanding                 20             20
     Additional paid-in capital                                         33,033         33,223
     Accumulated deficit                                               (24,438)       (21,886)
     Deferred compensation                                                 (21)          --
                                                                      --------       --------
              Total stockholders' equity                                 8,594         11,357
                                                                      --------       --------
              Total liabilities and stockholders' equity              $ 16,648       $ 19,996
                                                                      ========       ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.



                                       23
<PAGE>

Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                       For the Year Ended
                                                            Jan. 3, 1999  Dec. 28, 1997  Dec. 29, 1996
<S>                                                          <C>            <C>            <C>  
Net sales                                                     $  9,393       $ 11,665       $ 10,974
Cost of sales                                                    4,466          4,772          4,062
                                                              --------       --------       --------
Gross profit                                                     4,927          6,893          6,912
                                                              --------       --------       --------

Operating expenses:
     Selling, general and administrative                         5,944          6,613          8,072
     Product development                                         1,179            910          1,404
     Non-recurring charges (credits) (Note 12)                     485           (177)         1,504
                                                              --------       --------       --------
                                                                 7,608          7,346         10,980
                                                              --------       --------       --------

Operating loss                                                  (2,681)          (453)        (4,068)

Equity in loss of joint venture                                   --             --              164
Other (income) loss                                               (407)          (366)            23
Interest expense                                                   593            649            581
Interest income                                                   (318)          (367)          (328)
                                                              --------       --------       --------
Loss before income taxes                                        (2,549)          (369)        (4,508)

Income taxes                                                         3             12           --
                                                              --------       --------       --------
Net loss                                                      ($ 2,552)      ($   381)      ($ 4,508)
                                                              ========       ========       ========

Basic and diluted loss per share (Note 1)                     ($  1.29)      ($  0.19)      ($  2.28)
                                                              ========       ========       ========

Shares used in calculation of basic and diluted loss per
 share                                                           1,978          1,977          1,973
                                                              ========       ========       ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                       24
<PAGE>

Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)


<TABLE>
<CAPTION>
                                                                Additional
                                                   Common        Paid-In         Accumulated        Deferred
                                                    Stock        Capital           Deficit         Compensation        Total

<S>                                              <C>             <C>              <C>              <C>              <C>     
Balance, December 31, 1995                        $     20        $ 32,667         ($16,997)            --           $ 15,690
Conversion of subordinated notes to common
  stock (28 shares)                                   --               126             --               --                126
Net loss                                              --              --             (4,508)            --             (4,508)
                                                  --------        --------         --------         --------         --------
Balance, December 29, 1996                              20          32,793          (21,505)            --             11,308
                                                  --------        --------         --------         --------         --------
Conversion of subordinated notes to common
stock (6 shares)                                      --                27             --               --                 27
Stock warrants issued (Note 7 & 11)                   --               403             --               --                403
Net loss                                              --              --               (381)            --               (381)
                                                  --------        --------         --------         --------         --------
Balance, December 28, 1997                              20          33,223          (21,886)            --             11,357
                                                  --------        --------         --------         --------         --------
Conversion of subordinated notes to common
stock (2 shares)                                      --                 9             --               --                  9
Stock warrants cancelled (Note 7 & 11)                --              (232)            --               --               (232)
Stock warrants issued                                 --                33             --                (21)              12
Net loss                                              --              --             (2,552)            --             (2,552)
                                                  --------        --------         --------         --------         --------
Balance, January 3, 1999                          $     20        $ 33,033         ($24,438)        ($    21)        $  8,594
                                                  ========        ========         ========         ========         ========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                       25
<PAGE>

Surgical Laser Technologies, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
                                                                             For the Year Ended
                                                                  Jan. 3, 1999  Dec. 28, 1997    Dec. 29, 1996
<S>                                                                 <C>             <C>             <C>     
Cash Flows From Operating Activities:
   Net loss                                                         ($2,552)        ($  381)        ($4,508)
   Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
    Equity in loss of joint venture                                    --              --               164
    Depreciation and amortization                                     1,055           1,086             981
    Imputed interest                                                    (25)            (16)            (18)
    Non-recurring charges                                               485             847           1,030
  (Increase) decrease in assets:
    Accounts receivable                                                 488             974             560
    Inventories                                                         588             285             488
    Other current assets                                                  8            (310)             61
    Other assets                                                         95               2               7
  Increase (decrease) in liabilities:
    Accounts payable                                                    251            (265)            308
    Accrued liabilities                                                (276)         (1,235)           (422)
                                                                    -------         -------         -------
       Net cash provided by (used in) operating activities              117             987          (1,349)
                                                                    -------         -------         -------

Cash Flows From Investing Activities:
    Cash received in acquisition of joint venture                      --              --               190
    Purchases (sales) of short-term investments                       1,909          (1,669)            (81)
    Additions to property and equipment                                 (99)           (154)           (334)
    Patent costs                                                        (85)            (46)            (61)
    (Purchase) cancellation of  marketing agreement                      16            (103)           --
    Investment in joint venture                                        --              --              (200)
                                                                    -------         -------         -------
       Net cash provided by (used in) investing activities            1,741          (1,972)           (486)
                                                                    -------         -------         -------

Cash Flows From  Financing Activities:
    Payments on long-term debt                                         (475)           (426)           (273)
    Issuance of stock warrants                                         --               171            --
                                                                    -------         -------         -------
          Net cash used in financing activities                        (475)           (255)           (273)
                                                                    -------         -------         -------

Net increase (decrease) in cash and cash equivalents                  1,383          (1,240)         (2,108)

Cash and Cash Equivalents, Beginning of Year                          1,555           2,795           4,903
                                                                    -------         -------         -------
Cash and Cash Equivalents, End of Year                              $ 2,938         $ 1,555         $ 2,795
                                                                    =======         =======         =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.


                                       26
<PAGE>

Surgical Laser Technologies, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 3, 1999

Note 1
Summary of Significant Accounting Policies:

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Surgical Laser Technologies, Inc. and its wholly owned subsidiaries ("SLT"). All
material intercompany balances and transactions have been eliminated.

Nature of Operations
SLT is engaged primarily in the development, manufacture, sale and rental of
proprietary laser systems and delivery systems for both contact and non-contact
surgery. SLT's Contact Laser(TM) System is comprised of a portable laser unit
that delivers laser energy through Contact Laser Delivery Systems. SLT's current
laser product line includes four portable laser units of various power levels, a
family of over 100 laser probes, laser scalpels, fibers and handpieces that
provide different Wavelength Conversion(TM) effect properties, power densities
and configurations appropriate for cutting, coagulation or vaporization.

Beginning in 1997 and continuing in 1998, SLT expanded its product offerings to
include non-laser based products specifically targeted at the Otolaryngology and
Head and Neck and Neurosurgery (ENT and Neurosurgery) markets. Those new product
offerings include a line of reusable handheld instruments and products for the
control of bleeding and irrigation.

Fiscal Year
SLT's fiscal year is the 52 or 53-week period ending the Sunday nearest to
December 31. Fiscal year 1998 included 53 weeks and fiscal years 1997 and 1996
included 52 weeks.

Cash and Cash Equivalents
SLT invests its excess cash in highly liquid short-term investments. SLT
considers short-term investments that are purchased with an original maturity of
three months or less to be cash equivalents. Cash and cash equivalents consisted
of the following at:

                                         January 3, 1999      December 28, 1997
                                         ---------------      -----------------
(In thousands)
Commercial paper                              $1,494               $   --
Cash and money market accounts                   898                  312
Repurchase agreements                            446                  865
Certificates of deposit-restricted               100                  100
U.S. Government securities                        --                  278
                                              ------               ------
                                              $2,938               $1,555
                                              ======               ======


Restricted cash at January 3, 1999 and December 28, 1997 consisted of a $100,000
certificate of deposit pledged to American United Life Insurance Company
("AULIC"), as a condition of the first mortgage agreement with AULIC (see Note
10).


                                       27
<PAGE>

Short-term Investments

Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), SLT has
classified its entire portfolio of short-term investments as available for sale
as they are available to support current operations or to take advantage of
other investment opportunities. Securities available for sale are stated at fair
value with unrealized gains and losses included in stockholders' equity.
Dividend and interest income is recognized when earned and is recorded in
interest income. The amortized cost of debt securities is adjusted for accretion
of discounts to maturity. Such amortization is also included in interest income.
SLT currently invests only in high-quality, short-term securities in accordance
with its investment policy. As such, there were no significant differences
between amortized cost and estimated fair value at January 3, 1999 or December
28, 1997. Additionally, because investments are short-term and are generally
allowed to mature, unrealized gains and losses for both years have been minimal.

The following table represents the estimated fair value breakdown of short-term
investments by category:

                                         January 3, 1999      December 28, 1997
                                         ---------------      -----------------
(In thousands)
U.S. Government securities                    $1,731              $2,821
U.S. corporate debt securities                 1,354                 770
Commercial paper                                  --               1,145
Certificates of deposit                           --                 258
                                              ------              ------
                                              $3,085              $4,994
                                              ======              ======

The estimated fair value of short-term investments at January 3, 1999 due in one
year and due after one year was $2,342,000 and $743,000, respectively.

Property, Equipment, Depreciation and Amortization

Property and equipment are recorded at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the assets, primarily 3
to 10 years for demonstration equipment, furniture and office equipment,
machinery and equipment, and 30 years for buildings. Leasehold improvements are
amortized over the lesser of their useful lives or the lease term. Depreciation
expense was $974,000 in 1998, $961,000 in 1997 and $984,000 in 1996.
Expenditures for major renewals and betterments to property and equipment are
capitalized, while expenditures for maintenance and repairs are charged to
operations as incurred.

Inventories

Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost is determined at the latest cost for raw materials and at
production cost (materials, labor and indirect manufacturing cost) for
work-in-process and finished goods.

Laser units and laser accessories located at medical facilities for sales
evaluation and demonstration purposes or those units/accessories used for
development and medical training are included in property and equipment under
the caption "demonstration equipment." These units and accessories are being
depreciated over a period of up to 5 years.


                                       28
<PAGE>

Patent Costs

Costs incurred to obtain or defend patents are capitalized and amortized over
the shorter of their estimated useful lives or eight years. Capitalized
litigation costs are netted against recoveries if and when a recovery is
attained (see Note 4).

Revenue Recognition and Warranty Costs

Upon shipment of its product or delivery of a service, SLT records a sale and
accrues the related estimated warranty costs, if any.

Deferred Service Revenue

Revenue under maintenance agreements is deferred and recognized over the term
(primarily 1 to 2 years) of the agreements on a straight-line basis.

Product Development Costs

Costs of research, new product and development and product redesign are charged
to expense as incurred.

Use of Estimates

The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Supplemental Cash Flow Information

Interest paid was $593,000, $649,000 and $581,000 in 1998, 1997 and 1996,
respectively. Income taxes paid in 1998, 1997 and 1996 were immaterial.

The following non-cash investing and financing activities occurred: (i) during
1998, 1997 and 1996, $9,000, $27,000 and $126,000, respectively, of the 8%
convertible subordinated notes were converted at the request of the note holders
into common stock at a pre-reverse split conversion price of $4.50 per share;
and (ii) on September 30, 1996, SLT acquired the remaining 50% interest in the
Mediq PRN/SLT joint venture for liabilities assumed (see Note 5).

Earnings (Loss) Per Share

Effective December 28, 1997, SLT adopted Statement of Financial Accounting
Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes
standards for computing and presenting earnings per share (EPS) and applies to
entities with publicly held common stock or potential common stock. SFAS 128
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings per Share. It replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.

Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised


                                       29
<PAGE>

or converted into common stock or resulted in the issuance of common stock that
would then share in the earnings of the entity.

For the years ended January 3, 1999, December 28, 1997 and December 29, 1996,
SLT has reported earnings per share on the face of the income statement. Due to
SLT's net loss position in 1998, 1997 and 1996, the inclusion of common share
equivalents had an anti-dilutive effect when calculating diluted earnings per
share and, as a result, diluted EPS was equivalent to basic EPS for those years.
All earnings per share calculations have been restated for the effect of the
one-for-five reverse Common Stock split implemented on January 8, 1999, as
discussed in Note 6.

Impairment of Long-Lived Assets

Pursuant to Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," SLT is required to evaluate the impairment of long-lived assets and certain
identifiable intangible assets on a periodic basis. SLT reviews the
realizability of its long-lived assets and other intangibles by analyzing the
projected undiscounted cash flows and adjusts the net book value of the recorded
assets when necessary. No such adjustments have been recorded in 1998, 1997 or
1996, except as discussed in Note 12.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 became effective for fiscal years beginning after
December 15, 1997, with initial application as of the beginning of SLT's 1998
fiscal year. SFAS 130 requires comparative financial statements provided for
earlier periods to be reclassified to reflect application of the provisions of
the new standard.

SLT has reviewed SFAS 130 and has determined that for the years ended January 3,
1999 and December 28, 1997, no items meeting the definition of comprehensive
income as specified in SFAS 130 existed in the consolidated financial
statements. As a result, no disclosure is necessary to comply with SFAS 130.


Note 2
Inventories:
(In thousands)
                                        January 3, 1999     December 28, 1997
                                        ---------------     -----------------
Raw materials and work-in-process            $1,691               $1,702
Finished goods                                  849                1,284
                                             ------               ------
                                             $2,540               $2,986
                                             ======               ======



                                       30
<PAGE>

Note 3
Property and Equipment and Property Held for Sale:
(In thousands)
                                        January 3, 1999     December 28, 1997
                                        ---------------     -----------------
Property and equipment:
  Furniture and office equipment             $3,608               $3,549
  Machinery and equipment                     2,588                2,549
  Demonstration equipment                       419                1,391
  Leasehold improvements                        165                  163
                                             ------               ------
                                              6,780                7,652
Less-Accumulated depreciation
  and amortization                           (5,589)              (5,654)
                                             ------               ------
Property and equipment, net                  $1,191               $1,998
                                             ======               ======

At January 3, 1999 and December 28, 1997, net property and equipment included
$150,000 and $310,000 respectively, for assets recorded under capitalized lease
arrangements (see Note 5). The related lease obligation of $494,000 and
$741,000, was included in long-term debt at January 3, 1999 and December 28,
1997, respectively (see Note 10).

                                        January 3, 1999     December 28, 1997
                                        ---------------     -----------------
Property held for sale:
  Building held for sale                     $5,722               $6,047
  Land held for sale                            750                  750
                                             ------               ------ 
                                              6,472                6,797
Less-Accumulated depreciation
  and amortization                           (2,133)              (1,928)
                                             ------               ------ 
Property held for sale, net                  $4,339               $4,869
                                             ======               ======

In July 1996, SLT relocated its administration, research and manufacturing
operations from its owned and leased facilities in Oaks, Pennsylvania to a
leased facility in Montgomeryville, Pennsylvania. In July 1996, SLT entered into
an agreement to sublease the owned facility in Oaks, Pennsylvania for three
years. The agreement provided for a purchase option in 1999. The excess of the
lease income over the depreciation expense and facility costs was recorded as
other income in the accompanying consolidated statements of operations. Future
undiscounted cash flows from rents and proceeds from the sale of the property
exceeded the net book value of the property at January 3, 1999. The net property
held for sale included non-recurring charges of $325,000 and $542,000 in 1998
and 1997, respectively (see Note 12). The Company entered into an agreement of
sale on this facility in November 1998 and expects to close on the sale of the
facility before the end of June 1999.

                                       31
<PAGE>

Note 4
Patents and Licensed Technology:
(In thousands)
                                          January 3, 1999     December 28, 1997
                                          ---------------     -----------------
Patents, net of accumulated
  amortization of $482 and $414                $530                 $514
Licensed technology, net of accumulated
  amortization of $9 and $17                     14                   62
                                               ----                 ----
                                               $544                 $576
                                               ====                 ====

During 1998, SLT terminated one of its licensed technology agreements which at
the time of cancellation had a value net of accumulated amortization of $45,000
(see Note 15).

Note 5
Acquisition of Joint Venture:

On September 30, 1996, SLT acquired the remaining 50% interest in the Mediq
PRN/SLT joint venture held by Mediq PRN for the assumption of outstanding
liabilities. The joint venture company was formed in 1993 to provide rentals of
lasers and related equipment to hospitals and other health care providers. Prior
to the acquisition, the investment in Mediq PRN/SLT was recorded using the
equity method of accounting. Sales to Mediq PRN/SLT were recorded at an
arms-length price. Under the equity method, 50% of the gross margin from sales
to the joint venture was deferred and amortized to income as the related asset
was used by the joint venture. SLT's sales to Mediq PRN/SLT were $131,000 and
$916,000 for the nine months ended September 29, 1996 and the fiscal year ended
December 31, 1995, respectively. SLT contributed $200,000 and $150,000 of
capital to the joint venture in 1996 and 1995, respectively.

The acquisition of Mediq PRN/SLT was accounted for as a purchase acquisition
and, accordingly, the results of operations of Mediq PRN/SLT for the periods
from the date of acquisition are included in the accompanying consolidated
financial statements.

On September 29, 1996, prior to the acquisition, SLT's investment in Mediq
PRN/SLT and the deferred gross profit on sales to Mediq PRN/SLT were $380,000
and $280,000, respectively, resulting in a net investment of $100,000. As of the
acquisition date, the fair value of the net assets of the joint venture exceeded
SLT's net investment by $218,000, which was used to reduce the net book value of
rental equipment. The net investment of $100,000 was allocated to the assets
purchased and liabilities assumed, based upon the fair values on the date of
acquisition, as follows (in thousands):

Current assets, excluding cash acquired                   $360
Rental equipment                                           669
Other assets                                                17
Other liabilities                                         (140)
Long-term debt                                            (996)
                                                          ----
                                                           (90)
Cash acquired                                              190
                                                          ----
Net assets acquired                                       $100
                                                          ====

                                       32
<PAGE>

The rental equipment acquired included $464,000 of lasers which are being
accounted for as capital lease equipment under the guidelines of SFAS No. 13 and
were recorded within property and equipment on the balance sheets (see Note 3).
These lasers are being depreciated over a three year period. The long-term debt
associated with these lasers was recorded within both current and long-term debt
in the consolidated balance sheets (see Note 10).

Note 6
Common Stock Reverse Split:

On December 18, 1998, the stockholders of SLT approved an amendment of SLT's
Restated Certificate of Incorporation to effect a one-for-five reverse split of
the shares of SLT's Common Stock. SLT implemented the one-for-five reverse split
on January 8, 1999. All stockholders owning five or more shares of SLT's Common
Stock at the effective date received one share of Common Stock in replacement
for each five shares they held prior to the reverse split. For those conversions
resulting in fractional shares and for each stockholder owning fewer than five
common shares at the effective date, the stockholder was entitled to receive
cash in lieu of a fractional share at $0.41 per pre-split share. Par value of
the Common Stock remained unchanged at $0.01 For all periods presented,
references to the number of common shares, stock options, stock warrants and
earnings per share amounts in the consolidated financial statements and related
footnotes have been restated as appropriate to reflect the effect of the reverse
split.

Note 7
MedTREK Agreement:

During 1997, SLT acquired exclusive worldwide rights to certain new products and
medical devices used in minimally invasive otolaryngology and head and neck
(ENT) surgery, pursuant to an agreement with MedTREK Corporation and its
President, Mr. Dom L. Gatto. In accordance with the terms of the agreement, SLT
is required to make cash payments to MedTREK when certain products have been
commercially introduced and to issue stock warrants to MedTREK which will vest
when predetermined revenue targets have been achieved.

During 1997, SLT issued 300,000 stock warrants to MedTREK and has valued these
warrants using the Black-Scholes Option Pricing Model (see Note 11). At December
28, 1997, the value of these warrants was $232,000 and the additional cash cost
of acquiring the rights to the products as described above was $248,000. This
total cost of $480,000 was included in other long-term assets in the
consolidated balance sheet at December 28, 1997. At December 28, 1997,
outstanding payments due to MedTREK of $145,000 were included in accrued
liabilities in the consolidated balance sheet of SLT (see Note 9).

During 1998, SLT concluded that certain products under the agreement would not
be commercialized. As a result, the net value of the agreement and any remaining
liabilities associated with those products were written-off in December 1998.
Also, since those products will not be commercialized, it is improbable that the
predetermined revenue targets necessary to vest the warrants will be achieved.
Therefore, in December 1998, SLT wrote-off the value of the warrants. The net
other long-term asset and accrued liability balance associated with the products
and warrants written-off in December 1998 was $286,000 and $95,000,
respectively. As of January 3, 1999, the remaining net other long-term asset and
accrued liability was $65,000 and $20,000, respectively. This remaining asset
and liability is associated with the products for which commercial introduction
has or will occur, and continues to be amortized over its original five-year
life.

                                       33
<PAGE>

Note 8
Short-Term Borrowings:

At January 3, 1999 and December 28, 1997, SLT had a $2,535,000 line of credit
with a bank. The line of credit provides for a $535,000 sub-line for letters of
credit. Under its sub-line, SLT issued a letter of credit for $389,000 at
January 3, 1999, which replaced the letter of credit issued in 1997 of $453,000,
in favor of Montgomery County Industrial Development Corporation ("MCIDC") under
the terms of the Mortgage and Security Agreement. Additionally, in 1996, SLT
issued a letter of credit for $17,510 to its lessor, in compliance with the
lease agreement for the Montgomeryville, Pennsylvania facility. Other than for
these letters of credit there were no other borrowings on the line at any time
during 1998 and 1997. Borrowings on the line are secured by accounts receivable
and inventories and bear interest at the bank's prime rate plus 1/2%. Borrowings
on the line are subject to certain covenants, as defined, with which SLT was in
compliance at January 3, 1999 and December 28, 1997. This credit facility
expires on May 31, 1999.

Note 9
Accrued Liabilities:
(In thousands)
                                        January 3, 1999     December 28, 1997
                                        ---------------     -----------------
Facility related accruals
  (see Note 12)                                $482                 $523
Deferred revenues                               225                  317
Accrued compensation                            167                  176
Other                                           256                  465
                                             ------               ------
                                             $1,130               $1,481
                                             ======               ======


Note 10
Long-term Debt:
(In thousands)
                                        January 3, 1999     December 28, 1997
                                        ---------------     -----------------
Mortgage loans on property held
  for sale (see Note 3)                      $4,043               $4,272
Convertible subordinated notes                1,624                1,633
Capital lease obligations
  (see Note 3 and Note 5)                       494                  741
                                             ------               ------
                                              6,161                6,646
Less-Current portion                         (2,196)                (504)
                                             ------               ------
                                             $3,965               $6,142
                                             ======               ======

At January 3, 1999 and December 28, 1997, the estimated fair value of long-term
debt described above was approximately the same as the carrying amount of such
debt.

At January 3, 1999, mortgage loans included $2,865,000 remaining on a 10.5%
mortgage note, payable through 2011; and $1,178,000 remaining on a 3% mortgage
note, payable through 2006. The 10.5% note, held by AULIC, contains a provision
which prohibits prepayment until 2001 and is collateralized by restricted cash
of $100,000 and property and improvements. The 3% note is held by MCIDC on
behalf of the Pennsylvania Industrial Development Authority. A condition of this
note requires SLT to grant a security interest in assets equal to fifty percent
of the principal balance. At January 3, 1999, this condition was met by a letter
of credit (see Note 8), a first security interest in certain fixed assets and a

                                       34
<PAGE>

second security interest in accounts receivable and inventory. The facility is
under an agreement of sale which is expected to close by the end of June 1999,
at which time these mortgages are expected to be assumed by the buyer.

The convertible subordinated notes bear interest at 8%, become due in July 1999
and require interest payments quarterly. The notes were issued as part of a
settlement of certain stockholders class-action litigation against SLT and
certain directors and officers in 1992. The notes are convertible at the option
of the holders into shares of SLT's Common Stock at a conversion price of
$22.50, as adjusted for the one-for-five reverse Common Stock split (see Note
6), and may be prepaid, without penalty, if the fair value of SLT's common stock
exceeds 125% of the conversion price for a specified period.

The obligations under capital leases are at fixed interest rates ranging from
9.5% to 13.44% and are collateralized by the related property and equipment (see
Note 3).

Future minimum rentals for property under capital leases are as follows (in
thousands of dollars):

Year                                                       Amount
----                                                       ------
1999                                                        $388
2000                                                         161
2001                                                          10
2002                                                           9
                                                            ----
Total minimum lease obligation                               568
Less:  Interest                                              (74)
                                                            ----
Present value of total minimum lease obligation             $494
                                                            ====


The amount of long-term debt (excluding obligations under capital leases)
maturing in each of the next five years is $1,868,000 in 1999, $260,000 in 2000,
$278,000 in 2001, $298,000 in 2002, $319,000 in 2003 and $2,644,000 in 2004 and
thereafter.

Note 11
Common Stock Options and Common Stock Warrants:

Common Stock Options:

All common stock option and warrant information presented in this note,
including the number and prices of options and warrants, have been restated for
the effect of the one-for-five reverse split of Common Stock implemented on
January 8, 1999 (see Note 6).

Under SLT's 1986 Non-Qualified Stock Option Plan, 1986 Incentive Stock Option
Plan, Equity Incentive Plan and Second Amended and Restated Stock Option Plan
for Outside Directors (the "Option Plans"), an aggregate of 482,645 shares of
common stock may be issued pursuant to options that may be granted to certain
officers, directors, key employees and others. Options under all plans expire no
more than 10 years from the date of grant and have varying vesting schedules.

In February 1996, the 1986 Non-Qualified Stock Option Plan and the 1986
Incentive Stock Option Plan expired by their terms with respect to any future
grants. At January 3, 1999, these plans had options to purchase 280 shares of
common stock outstanding and exercisable.



                                       35
<PAGE>

On December 31, 1997, options to purchase 79,520 shares of common stock were
forfeited. SLT has presented all option disclosures as if these options had been
forfeited on December 28, 1997.

SLT accounts for the Option Plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the Option
Plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), SLT's net loss would have been increased by
approximately $323,000, $294,000 and $251,000 for the years ended January 3,
1999, December 28, 1997 and December 29, 1996 respectively. SLT's net loss per
share would have been increased by approximately $0.16, $0.15 and $0.13 for the
years ended January 3, 1999, December 28, 1997, and December 29, 1996,
respectively.

The per share fair value of options granted during the years ended January 3,
1999, December 28, 1997 and December 29, 1996, was estimated at $2.93, $3.13 and
$6.82, respectively. There were no options granted below market or above market
during the three years. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 5.554%, 6.346% and
6.360% for 1998, 1997 and 1996 grants, respectively; an expected life of five
years, five years, and eight years for 1998, 1997 and 1996 grants, respectively;
dividend yield of zero for all grants; and volatility of .495, .476 and .777 for
1998, 1997 and 1996 grants, respectively. Because the SFAS 123 method of
accounting is not required to be applied to options granted prior to January 2,
1995, the resulting pro forma compensation charge may not be representative of
that which may be expected in future years.

The following table summarizes the transactions of SLT's Option Plans for the
three year period ended January 3, 1999:

<TABLE>
<CAPTION>
                                                                             Option            Average
                                                            Shares            Price             Price
                                                            ------            -----             -----
<S>                                                       <C>             <C>                 <C>   
Outstanding options at December 31, 1995                    298,857       $7.80-100.85          $27.15
Granted                                                     125,180         6.25-15.65            8.60
Forfeited                                                   (39,908)       6.25-100.85           51.80
                                                           --------        -----------          ------
Outstanding options at December 29, 1996                    384,129        $6.25-75.00          $18.55
Granted                                                     101,800          5.65-9.55            7.15
Forfeited                                                  (192,099)        5.95-75.00           20.30
                                                           --------        -----------          ------
Outstanding options at December 28, 1997                    293,830        $5.65-75.00          $13.45
Granted                                                      49,200          1.72-7.03            5.86
Forfeited                                                   (38,168)        1.72-75.00           15.47
                                                           --------        -----------          ------
Outstanding options at January 3, 1999                      304,862        $2.03-75.00          $11.98
                                                           ========        ===========          ======
</TABLE>



                                       36
<PAGE>

At January 3, 1999, there were 190,050 options vested and exercisable and
177,783 options were available for grant. The following table summarizes the
options outstanding and exercisable by price range at January 3, 1999:

<TABLE>
<CAPTION>
                                     OPTIONS OUTSTANDING                     OPTIONS EXERCISABLE
                                     -------------------                     -------------------
                                               Weighted       Weighted                      Weighted
                                                Average        Average                       Average
Range of Exercise            Number           Remaining       Exercise          Number      Exercise
           Prices       Outstanding    Contractual Life          Price     Exercisable         Price
-----------------       -----------    ----------------       --------     -----------      --------
<S>                    <C>             <C>                   <C>           <C>              <C>  
      $2.03-$6.25            74,700                8.16          $5.62          38,392         $6.15
      $7.03-$7.81            62,932                8.31          $7.18          20,159         $7.37
     $8.13-$10.31            79,200                7.87          $9.96          47,129        $10.09
    $10.63-$21.25            63,450                5.33         $17.08          59,790        $17.35
    $26.90-$75.00            24,580                2.63         $36.89          24,580        $36.89
    -------------           -------                ----         ------         -------        ------
     $2.03-$75.00           304,862                7.08         $11.98         190,050        $14.76
    =============           =======                ====         ======         =======        ======
</TABLE>

Common Stock Warrants:

During 1997, SLT issued 300,000 stock warrants to MedTREK as part of the MedTREK
Agreement (see Note 7). The value of the warrants at December 28, 1997 was
$232,000. During 1998, SLT concluded that certain products under the agreement
would not be commercialized, and therefore, that it was improbable that the
predetermined revenue targets necessary to vest the warrants would be achieved.
Therefore, in December 1998, SLT wrote-off the value of the warrants.

In July 1997, SLT entered into an agreement to develop and supply certain
laser-related devices. In connection with this agreement, SLT issued a warrant
to purchase 40,000 shares of SLT's common stock with an exercise price of $10.00
per share. In December 1997, SLT issued an additional warrant to purchase 40,000
shares of common stock with an exercise price of $10.00 per share. Both warrants
will expire on December 31, 2002. SLT recorded the $171,000 value of these
warrants as an increase to additional paid-in capital and an offset to revenue
earned under the agreement. At January 3, 1999, 80,000 warrants were exercisable
for an exercise price of $10.00.

Note 12
Non-recurring Items:

The 1998 non-recurring charge represented costs on the impending sale of SLT's
former headquarters facility in Oaks, Pennsylvania, which is expected before
June 1999. The charge consisted of a $325,000 write-down of the facility (see
Note 3) necessitated by the terms of the impending sale and $160,000 in accrued
closing costs (see Note 9).

In 1997 SLT recorded non-recurring credits of $177,000, which was the net effect
of recording a benefit from the settlement of litigation of $1,000,000, offset
in part by non-recurring charges of $542,000 related to SLT's former
headquarters facility in Oaks, Pennsylvania (see Note 3) and $281,000 related to
SLT's former manufacturing facility in Kentucky. The $542,000 charge resulted
from a write-down in the carrying value of the former headquarters facility
necessitated by the terms under which the facility


                                       37
<PAGE>

was expected to be sold at the end of the initial sublease term. The $281,000
charge resulted from the loss of a former tenant and the subsequent signing of a
new tenant at a lesser rate.

In 1996, SLT recorded non-recurring charges of $1,504,000, which included
$303,000 in leasehold improvement write-offs related to SLT's Oaks, Pennsylvania
manufacturing facility, $1,151,000 for severance and other costs associated with
manpower reductions and restructuring and $50,000 for additional costs
associated with sub-leases in Hebron, Kentucky.

Note 13
Retirement Savings Plan:

SLT has a defined contribution retirement plan that provides all eligible
employees an opportunity to accumulate funds for their retirement. The plan is
qualified under Section 401(k) of the Internal Revenue Code and provides for
discretionary matching contributions by SLT of 50% of pretax contributions by an
employee, up to a maximum of 6% of the employee's compensation. SLT did not make
matching contributions in 1998, 1997 or 1996.

Note 14
Income Taxes:

SLT accounts for income taxes pursuant to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 is an
asset-and-liability approach that requires the recognition of deferred tax
assets and liabilities for the expected tax consequences of events that have
been recognized in SLT's financial statements or tax returns.

SLT recorded provisions of $3,000, $12,000, and $0 in 1998, 1997 and 1996,
respectively. The provisions were for certain state income taxes; none was for
federal alternative minimum taxes ("AMT"). No provision was recorded in 1996 due
to losses incurred. Any other provisions, including accrual adjustments for
prior periods, were completely offset by changes in the deferred tax valuation
allowance, primarily due to the utilization of operating loss carryforwards.

Income tax expense (benefit) consists of the following (in thousands of
dollars):

                                       1998            1997           1996
                                       ----            ----           ----
Federal including AMT tax
     Current                         $  --           $  --           $  --
     Deferred                           (995)           (253)         (1,711)
State
     Current                               3              12            --
     Deferred                            (69)            (45)            (61)
                                     -------         -------         -------
                                      (1,061)           (286)         (1,772)
Change in valuation allowance          1,064             298           1,772
                                     -------         -------         -------
Income tax expense                   $     3         $    12         $  --
                                     =======         =======         =======


SLT has no income that is subject to foreign taxes.


                                       38
<PAGE>

A reconciliation of the effective tax rate with the federal statutory tax rate
is as follows (in thousands of dollars):

                                       1998            1997            1996
                                       ----            ----            ----

Expected federal tax expense
  (benefit) at 34% rate              ($  867)        ($  125)        ($1,532)
Change in valuation allowance          1,064             298           1,772
Other, at 34% rate                      (197)           (173)           (240)
State income tax                           3              12            --
                                     -------         -------         -------
Income tax expense                   $     3         $    12         $  --
                                     =======         =======         =======


As of January 3, 1999, SLT had approximately $23,672,000 of federal net
operating loss carryforwards, which begin to expire in 2001. Included in the
aggregate net operating loss carryforwards are $6,850,000 of tax deductions
related to equity transactions, the benefit of which will be credited to
stockholders' equity, if and when realized against taxes not reducible by other
deductions. In addition, SLT had approximately $841,000 of federal tax credit
carryforwards which begin to expire in 1999. Net deductible temporary
differences were approximately $5,352,000 at January 3, 1999.

The changes in the deferred tax asset are as follows (in thousands of dollars):

                                                        1998             1997
                                                        ----             ----
Beginning balance, gross                              $ 10,318        $ 10,020
Net changes due to:
     Operating loss carryforwards, valued at 35%           689            (603)
     Temporary differences, valued at 40%                  325             848
     Carryforward & AMT credits                             50              53
                                                      --------        --------
Ending balance, gross                                   11,382          10,318
Less:  valuation allowance                              11,382          10,318
                                                      --------        --------
Ending balance, net                                   $   --          $   --
                                                      ========        ========


The ending balances of the deferred tax asset have also been fully reserved,
reflecting the uncertainties as to realizability evidenced by SLT's historical
results and the general market conditions being experienced.


                                       39
<PAGE>

Deferred tax assets (liabilities) are comprised of the following (in thousands
of dollars):

                                                      1998             1997
                                                      ----             ----
Assets:
 Temporary differences, @40%
  Bad debts                                        $    160         $    166
  Building loss                                         415              217
  Deferred R&D costs                                  1,022              943
  Deferred revenues                                      90             --
  Inventoriable costs                                    37               40
  Inventory reserves                                    316              415
  Legal costs                                           308              278
  Relocation reserve                                    129              200
  Severance                                              11               48
  Warranty                                                9               12
  Misc. temporary differences                            42               53
Loss carryforwards @35%                               8,285            7,596
Carryforward & AMT credits                              956              906
                                                   --------         --------
Gross deferred tax assets                            11,780           10,874
                                                   --------         --------
Liabilities:
  Depreciation @ 40%                                   (398)            (556)
                                                   --------         --------
Gross deferred tax liabilities                         (398)            (556)
                                                   --------         --------
Net deferred tax asset                               11,382           10,318
Deferred net tax asset, valuation allowance         (11,382)         (10,318)
                                                   --------         --------
Net deferred tax asset, after valuation            $   --           $   --
                                                   ========         ========

The average federal and state income tax rate (net of federal benefit) used to
value operating loss carryforwards is 35%, due principally to more stringent
usage requirements for loss carryforwards in the Commonwealth of Pennsylvania.

Note 15
Related Party Transactions:

A partner in the firm which acts as primary legal counsel to SLT is also a
director and stockholder of SLT. In 1998, 1997 and 1996, the firm's legal fees
were approximately $58,000, $324,000 and $388,000 respectively.

In September 1995, SLT made an $82,000 equity investment, which represents an
11% interest, in the common stock of one of its international distributors. SLT
accounts for this investment using the cost method. SLT's sales to the
distributor were $23,000, $26,000 and $144,000 for the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Accounts
receivable from sales to the distributor were $7,000 and $69,000 at January 3,
1999 and December 28, 1997, respectively. SLT's Chief Executive Officer is a
member of the distributor's Board of Directors.

During 1994, SLT entered into a License Agreement with Fuller Research
Corporation for certain fiber delivery system technology. The principal
stockholder of Fuller Research Corporation was a director and an executive
officer of SLT until November 1996. The licensed technology was patented by
Fuller Research Corporation before its principal stockholder became an executive
of SLT. SLT paid $45,000


                                       40
<PAGE>

and $34,000 in royalties under the terms of the license agreement in 1997 and
1996 respectively. SLT terminated the license agreement effective February 28,
1998 (see Note 4).

During 1994, SLT entered into an Investment Agreement with Kontron Instruments
Holding N.V. ("Kontron Instruments") under the terms of which Kontron
Instruments Group made a $2.0 million equity investment in SLT, representing a
7% ownership position. Kontron Instruments Holding N.V. is the parent company of
Kontron Instruments Group, a European medical instruments manufacturer, which
operated as SLT's market development and distribution partner throughout most of
Europe for a portion of fiscal 1997 and all of fiscal 1996. SLT's sales to
Kontron Instruments Group were $53,000, $112,000 and $433,000 for the fiscal
years ended January 3, 1999, December 28, 1997 and December 29, 1996,
respectively. Accounts receivable from sales to Kontron Instruments Group were
$31,000 and $23,000 at January 3, 1999 and December 28, 1997, respectively. A
member of SLT's Board of Directors served as Chief Executive Officer of Kontron
Instruments Holding, N.V. until December 1998.

Note 16
Business Segment and Geographic Data:

Effective January 3, 1999, SLT adopted Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 requires that a public business enterprise
report financial and descriptive information about its reportable operating
segments. SFAS 131 defines operating segments as "components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance".

SLT is engaged primarily in one business segment: the design, development,
manufacture and marketing of laser products and other instruments for medical
applications. SLT's customers are primarily hospitals and medical centers. For
the years 1998, 1997, and 1996, SLT did not have material net sales to any one
individual customer.

SLT reports net sales in the following categories (in thousands of dollars):

                                                  1998        1997        1996
                                                  ----        ----        ----
                                                 
   Disposables and accessories                   $ 6,310     $ 6,651    $ 7,591
   Laser system sales, service and rental          3,083       4,042      3,383
   Other                                            --           972       --
                                                 -------     -------    -------
   Total net sales                               $ 9,393     $11,665    $10,974
                                                 =======     =======    =======



                                       41
<PAGE>

For the years 1998, 1997 and 1996, there were no material net sales attributed
to an individual foreign country. Net sales by geographic areas are as follows
(in thousands of dollars):

                                      1998          1997           1996
                                      ----          ----           ----
   Domestic                          $8,184        $9,822         $8,444
   Foreign                            1,209         1,843          2,530
                                     ------       -------        -------
   Total Net Sales                   $9,393       $11,665        $10,974
                                     ======       =======        =======
   
Note 17
Commitments and Contingencies:

As of January 3, 1999, SLT was a defendant in one pending lawsuit in which the
lower court had granted SLT summary judgement, and in which the plaintiffs filed
an appeal. In July 1998, an appellate court ruled entirely in SLT's favor on an
issue concerning SLT's Contact Laser(TM) proprietary position, and remanded the
other, sole remaining issue back to the lower court, finding triable issues of
fact. Having gauged the costs of further litigation, SLT embarked in January
1999 on settlement discussions with the plaintiffs, and based on those
discussions believes that a reasonable settlement can be achieved with the
plaintiffs. SLT has accordingly made provision for a substantial part of the
expenses it expects to incur in achieving settlement.

SLT leases office space and equipment under various non-cancelable operating
leases. For fiscal 1998, 1997 and 1996, rental payments were $540,000, $564,000,
and $540,000, respectively, and related primarily to facilities in
Montgomeryville, Pennsylvania; Oaks, Pennsylvania; and Hebron, Kentucky. The
Hebron facility was vacated in 1991 as a result of SLT's decision to consolidate
and relocate manufacturing and warehousing activities to Pennsylvania and has
subsequently been sublet (see Note 12). The Oaks, Pennsylvania facility lease
expired in December 1996 and was not renewed. Future minimum rental payments
under operating leases are as follows (in thousands of dollars):

  
                                  1999        2000        2001
                                  ----        ----        ----
   Minimum rental payments       $ 526       $ 420       $ 106
   Less:  Sublease payments       (108)        (72)       --
                                 -----       -----       -----
   Net rental payments           $ 418       $ 348       $ 106
                                 =====       =====       =====

SLT has severance agreements with certain key executives and employees which
create certain liabilities in the event of their termination of employment
without cause, or following a change in control of SLT. The aggregate commitment
in fiscal 1999 under these executive severance agreements, should all covered
executives and employees be terminated other than for cause, was approximately
$686,000 at January 3, 1999. Should all covered executives be terminated
following a change in control of SLT, the aggregate commitment under these
executive severance agreements at January 3, 1999 was approximately $657,000.


                                       42
<PAGE>

Note 18
Quarterly Financial Data (Unaudited):

<TABLE>
<CAPTION>
                                                          For the Quarter Ended
                                                     (In thousands, except per share)
----------------------------------------------   -------    -------    -------    -------
1998                                             March 29   June 28    Sept. 27    Jan. 3
----------------------------------------------   -------    -------    -------    -------
<S>                                              <C>        <C>        <C>        <C>    
Net sales                                        $ 2,367    $ 2,284    $ 2,200    $ 2,542
Gross profit                                       1,326      1,246      1,186      1,169
Net loss (1)                                        (461)      (527)      (527)    (1,037)
Basic and diluted loss per share                 ($ 0.23)   ($ 0.27)   ($ 0.27)   ($ 0.52)
----------------------------------------------   -------    -------    -------    -------
 1997                                            March 30   June 29    Sept. 28   Dec. 28
----------------------------------------------   -------    -------    -------    -------
Net sales                                        $ 3,073    $ 2,904    $ 3,007    $ 2,681
Gross profit                                       1,728      1,631      1,910      1,624
Net income (loss) (2)                               (197)      (282)        47         51
Basic and diluted earnings (loss) per share      ($ 0.10)   ($ 0.14)   $  0.02    $  0.03
----------------------------------------------   -------    -------    -------    -------
1996                                             March 31   June 30    Sept. 29   Dec. 29
----------------------------------------------   -------    -------    -------    -------
Net sales                                        $ 2,765    $ 2,784    $ 2,416    $ 3,009
Gross profit                                       1,715      1,855      1,576      1,766
Net loss (3)                                        (820)      (941)    (2,483)      (264)
Basic and diluted loss per share                 ($ 0.42)   ($ 0.48)   ($ 1.26)   ($ 0.13)
==============================================   =======    =======    =======    =======
</TABLE>

(1) Includes a non-recurring charge of $485,000 for the quarter ended 
    January 3, 1999 (see Note 12).
(2) Includes a non-recurring credit of $177,000 for the quarter ended 
    September 28, 1997 (see Note 12).
(3) Includes a non-recurring charge of $1,504,000 for the quarter ended
    September 29, 1996 (see Note 12).

For all periods presented, basic and diluted earnings (loss) per share has been
computed under the guidelines of SFAS No. 128 (see Note 1) and has been restated
for the effect of the January 8, 1999 one-for-five reverse Common Stock split
(see Note 6). In each period, the inclusion of common stock equivalents in the
calculation of diluted earnings (loss) per share had an antidilutive effect on
the calculation. As a result, diluted earnings (loss) per share was equivalent
to basic earnings (loss) per share for each period presented.

                                       43

<PAGE>


<TABLE>
<CAPTION>
                                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

            COLUMN A                  COLUMN B         COLUMN C                        COLUMN D           COLUMN E
            --------                  --------         --------                        --------           --------
                                                       Additions Charged to
                                                       --------------------
                                  Balance at                                                            Balance at  
                                  Beginning of      Cost and         Other                              End of
Description                       Period            Expenses         Accounts       Deductions (1)      Period      
-----------                       ------------      --------         --------       --------------      --------------
                                                          (In thousands)
<S>                                     <C>          <C>             <C>                  <C>               <C>

FOR THE YEAR ENDED 
JANUARY 3, 1999

Reserve for Doubtful Accounts           $155              --             --               $17               $138
                                        ====             ====          ====              ====               ====

FOR THE YEAR ENDED 
DECEMBER 28, 1997

Reserve for Doubtful Accounts           $116              $73            --               $34               $155
                                        ====             ====          ====              ====               ====

FOR THE YEAR ENDED 
DECEMBER 29, 1996

Reserve for Doubtful 
Accounts                                $118             $258            --              $260               $116
                                        ====             ====          ====              ====               ====
</TABLE>

(1) Represents write-offs of specific accounts receivable.


Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosures.

         Not applicable.

                                       44


<PAGE>


PART III

Item 10. Directors and Executive Officers of Registrant

Executive Officers

Certain information about the executive officers of Registrant as of March 15,
1999 is as follows:

<TABLE>
<CAPTION>
Name                                         Age     Positions held with Registrant
----                                         ---     ------------------------------
<S>                                          <C>     <C>                           
W. Keith Stoneback                           45      President, Chief Executive Officer and Director

Michael R. Stewart                           41      Vice President, Finance, Chief Financial Officer, and Treasurer

Davis Woodward                               51      Vice President, Legal & Tax Affairs and Secretary
</TABLE>


W. Keith Stoneback has served as President, Chief Executive Officer and a
director of Registrant since August 1996. From 1988 until 1994, he served in
several senior management positions for AMSCO International, Inc., a leading
manufacturer and marketer of sterilizers, surgical tables, lights and
decontamination equipment for the hospital and life science markets, most
recently as Corporate Vice President, with responsibility for worldwide
manufacturing, marketing and research and development for the capital equipment
and supplies business. From November 1994 until joining Registrant, Mr.
Stoneback pursued personal investment and business-related interests.

Michael R. Stewart has served as Vice President, Finance since January 1996 and
as Vice President and Chief Financial Officer since October 1990. Mr. Stewart
has served as Treasurer since November 1990.

Davis Woodward has served as Vice President, Legal & Tax Affairs since January
1995. From July 1990 to January 1995, Mr. Woodward served as Assistant General
Counsel and Director of Tax Planning. He has served as Secretary since November
1990.

Directors

The names of the Directors, and certain information about them as of March 15,
1999, are set forth below.

<TABLE>
<CAPTION>

Name of Director               Age                     Principal Occupation                       Director Since
----------------               ---                     --------------------                       --------------

<S>                             <C>     <C>                                                                  <C> 
Richard J. DePiano............. 57      Chairman and Chief Financial Officer of  Escalon                  1986
                                          Medical Corporation
Sheldon M. Bonovitz............ 61      Chairman and Partner, Duane, Morris & Heckscher LLP,              1985
                                          Counsel to Registrant
Jay L. Federman................ 61      Opthalmologist and attending Surgeon and Co-Director              1987
                                          Director of Research, Wills Eye Hospital and Chief of
                                          Opthalmology at Medical College of Pennsylvania
Vincenzo Morelli............... 44      Former Chief Executive of Kontron Instruments                     1995
                                          Holding, N.V. and presently pursuing other business
                                          and investment interests
W. Keith Stoneback............. 45      President and Chief Executive Officer of Registrant               1996
</TABLE>

                                       45

<PAGE>

Directors will serve until the 1999 Annual Meeting and until the due election of
their respective successors.

Except as set forth below, each of the nominees has been engaged in his
principal occupation described above for the past five years. There are no
family relationships among directors or officers of Registrant.

Richard J. DePiano has served as the Chairman of the Board of Directors of
Registrant since July 1995. Since March 1997, Mr. DePiano has served as Chairman
and Chief Executive Officer of Escalon Medical Corp., of which he is also a
director. Mr. DePiano has been the Chief Executive Officer of The Sandhurst
Company, L.P. and the Managing Director of The Sandhurst Venture Fund since
1986.

W. Keith Stoneback has served as President and Chief Executive Officer of
Registrant since August 1996. From 1988 until 1994, he served in several senior
management positions for AMSCO International, Inc., a leading manufacturer and
marketer of sterilizers, surgical tables, lights and decontamination equipment
for the hospital and life science markets, most recently as Corporate Vice
President, with responsibility for worldwide manufacturing, marketing and
research and development for the capital equipment and supplies business. From
November 1994 until joining Registrant, Mr. Stoneback pursued personal
investment and business-related interests.

Sheldon M. Bonovitz has been a partner in the law firm of Duane, Morris &
Heckscher LLP, Philadelphia, Pennsylvania, since 1969, where he also serves as
Chairman and a member of the management committee. Mr. Bonovitz also serves as a
director of Comcast Corporation.

Jay L. Federman, M.D. has been an attending surgeon at Wills Eye Hospital,
Philadelphia, Pennsylvania, since 1980 and an ophthalmologist in private
practice since 1968. Dr. Federman was a founder of SITE Microsurgical Systems,
Inc. and serves as a director of Escalon Medical Corp and Chief of Opthalmology
at the Medical College of Pennsylvania.

Vincenzo Morelli served as Chief Executive Officer of Kontron Instruments
Holding N.V. from 1993 until December 1998. Mr. Morelli is presently pursuing
other business and investment interests.

Item 11. Executive Compensation

Director Compensation

Each director of Registrant who is not an officer or employee of Registrant (an
"Outside Director") receives an annual retainer of $15,000 and a fee of $500 for
each committee meeting attended other than meetings held in conjunction with
meetings of the Board of Directors.

Registrant also maintains the Second Amended and Restated Stock Option Plan for
Outside Directors (the "Outside Director Plan"), pursuant to which: (a) on May
11, 1990, each Outside Director on such date received options to purchase 1,800
shares of Common Stock; (b) on May 11, 1990, each Outside Director who was a
member of the Executive Committee on such date received options to purchase an
additional 750 shares of Common Stock; (c) each Outside Director who had
completed three years of service as an Outside Director on or before April 30,
1992 received options to purchase 900 shares of Common Stock on such date; (d)
each Outside Director who had completed at least three years of service as an
Outside Director on May 26, 1994 (the "1994 Grant Date") was granted options to
purchase 9,000 shares, provided that if the Outside Director served as Chairman
on the 1994 Grant Date, the option

                                       46

<PAGE>

granted was for 12,000 shares; (e) each Outside Director who had not completed
three years of service as an Outside Director on the 1994 Grant Date will, on 
the last trading day coinciding with or immediately following the completion of 
such three years of service, be granted options to purchase 6,000 shares, 
provided that if the Outside Director serves as Chairman throughout such 
three-year period, such option will be for 9,000 shares; (f) for each three 
years of service after the 1994 Grant Date since the most recent grant of 
options to an Outside Director, the Outside Director will be granted options to 
purchase 6,000 shares, provided that if the Outside Director served as Chairman
throughout such three-year period, the option will be for 9,000 shares and 
(g) each person who became an Outside Director after the 1994 Grant Date or 
hereafter becomes an Outside Director in the future received or will receive 
options to purchase 6,000 shares of Common Stock on the fifteenth day after 
election as an Outside Director, provided that if the Outside Director is 
elected to serve as Chairman, the option granted will be for 9,000 shares.

All such options are exercisable at 100% of the fair market value of the Common
Stock on the date of grant and remain exercisable to the extent vested until the
earliest to occur of the expiration of ten years from the date of grant, three
years from cessation of service as a director due to disability, one year from
cessation of service as a director due to death or three months from cessation
of service as a director for any other reason. Options granted on May 11, 1990
were fully exercisable when granted. Options granted on the 1994 Grant Date were
exercisable 3,000 shares on the date of grant, with the balance exercisable in
three equal consecutive annual installments commencing one year from the 1994
Grant Date. All other options granted under the Outside Director Plan are or
will be exercisable in three equal consecutive annual installments commencing
one year from the date of grant. Notwithstanding the foregoing, all options
granted under the Outside Director Plan become fully exercisable upon
consummation of any business combination transaction involving the sale of all
or substantially all of the assets of Registrant to, or the acquisition of
shares of Registrant's Common Stock representing more than 50% of the votes
which all stockholders of Registrant are entitled to cast by, any person not
affiliated with Registrant, directly or indirectly, through one or more
affiliates, or any other transaction or series of transactions having a similar
effect.

An aggregate 77,000 shares of Common Stock are currently reserved for issuance
under the Outside Director Plan, of which 1,800 shares have been issued and
69,600 shares are subject to outstanding options.

Executive Officer Compensation

The following table sets forth certain information with respect to compensation
paid by Registrant during each of the three fiscal years ended January 3, 1999,
December 28, 1997 and December 29, 1996 to the chief executive officers of
Registrant and the other three executive officers of Registrant whose annual
salary and bonus in 1998 exceeded $100,000.

                                       47

<PAGE>


<TABLE>
<CAPTION>
                                            SUMMARY COMPENSATION TABLE

                                                                   Long-Term
                                                                   Compensation
                                            Annual                 ------------
                                            Compensation           Awards                
                                            ------------           ------               All Other
Name & Principal Position          Year     Salary ($)             Options              Compensation
-------------------------          ----     ----------             -------              ------------
                                                                   (#)(1)                ($)(2)
                                                                   -------               ------
<S>                                <C>      <C>                     <C>                 <C>  
W. Keith Stoneback (3)             1998       $229,327                    -                4,905
President, Chief Executive         1997        225,000              10,000(4)             38,275(5)
      Officer and Director         1996        101,539              60,000                18,298(6)

Michael R. Stewart                 1998        153,932                   --                  643
Vice President Finance and Chief   1997        143,843               5,000(4)                643
    Financial Officer              1996        123,119              10,000(7)                643

Glenn H. Stahl (8)                 1998        132,500                   --               10,583(9)
Vice President Sales and           1997        122,500              15,000                   --
    Marketing                      1996          --                      --                  --

Davis Woodward                     1998        127,392                   --                1,285
Vice President, Legal &            1997        119,664               4,000(4)              1,285
    Tax Affairs                    1996        112,638               5,000(7)              1,285
</TABLE>

------------

(1)  Restated for the effect of the one-for-five reverse Common Stock split
     implemented on January 8, 1999.
(2)  Except as noted in footnotes 5, 6 and 9, represents payments of premiums
     for certain supplementary life insurance coverage.
(3)  Mr. Stoneback joined Registrant as President, Chief Executive Officer and a
     director in August 1996.
(4)  These options were granted in 1998 for services rendered in 1997.
(5)  Includes $32,314 in moving and relocation payments made by Registrant to
     Mr. Stoneback pursuant to the terms of his Employment Agreement.
(6)  Includes $18,054 in moving and relocation payments made by Registrant to
     Mr. Stoneback pursuant to the terms of his Employment Agreement.
(7)  These options were granted in 1997 for services rendered in 1996.
(8)  Mr. Stahl served as Vice President, Sales and Marketing from January 1997
     until December 1998.
(9)  Represents severance pay related to Mr. Stahl's termination in December
     1998.

The following table sets forth information with respect to options granted
during the fiscal year ended January 3, 1999 to the persons named in the Summary
Compensation Table above. All information presented in the following table is
restated for the effect of the one-for-five reverse Common Stock split
implemented on January 8, 1999.

                                       48

<PAGE>


<TABLE>
<CAPTION>
                                           Option Grants in Last Fiscal Year

                                           
                                           % of Total                                Potential Realizable Value
                                           Options                                   at Assumed Annual Rates  
                                           Granted to                                of Stock Price Appreciation
                                           Employees                                 for Option Term
                            Options        In Fiscal    Exercise                     ---------------------------
Name                        Granted(#)     Year         Price        Expiration Date            5%              10%
----                        ----------     ----         -----        ---------------            ---            ----
<S>                           <C>          <C>          <C>          <C>                      <C>            <C>     
W. Keith Stoneback            10,000       23.1%        7.030        January 23, 2008         $44,211        $112,040
Michael R. Stewart             5,000       11.6%        7.030        January 23, 2008          22,106          56,020
Davis Woodward                 4,000        9.3%        7.030        January 23, 2008          17,685          44,816
</TABLE>

The following table sets forth information with respect to options held at
January 3, 1999 by the persons named in the Summary Compensation Table above. No
options were exercised by such persons during the fiscal year ended January 3,
1999. No outstanding options were in the money at January 3, 1999. All
information presented in the following table is restated for the effect of the
one-for-five reverse Common Stock split implemented on January 8, 1999.


<TABLE>
<CAPTION>
                          Fiscal Year-End Option Values

                                                      Number of Unexercised Options
                                                      at Fiscal Year End
                                               --------------------------- -----------------------
                                Name                          Exercisable           Unexercisable
                                ----                          -----------           -------------
<S>                                                                <C>                     <C>   
              W. Keith Stoneback                                   40,000                  30,000
              Michael R. Stewart                                   21,673                  15,267
              Glenn H. Stahl                                        5,000                   --
              Davis Woodward                                       18,506                  10,934
</TABLE>

Employment and Other Agreements

In August 1996, Registrant entered into an employment agreement with W. Keith
Stoneback pursuant to which Mr. Stoneback will serve as Registrant's President
and Chief Executive Officer through December 31, 1999 and, thereafter, for
successive one-year terms absent at least three months' prior written notice of
termination by either party. Mr. Stoneback's annual base salary under the
agreement is $225,000, and his agreement provides that he will be eligible for a
bonus of 50% of base salary pursuant to bonus programs developed by the Board of
Directors based on objective criteria related to Registrant's results of
operations. No bonus was paid for services under the 1998 bonus program. If Mr.
Stoneback's employment is terminated by Registrant without cause during the
initial or any renewal term of the agreement (other than following a change in
control as described below), Mr. Stoneback will be entitled to severance
benefits equal to continuation of his base salary, health, disability and life
insurance for a one-year period and the right to exercise options which are not
then exercisable but would have become exercisable on the next anniversary of
the agreement. If Mr. Stoneback's employment is terminated without cause within
three months following a change in control, Mr. Stoneback will be entitled to
severance benefits equal to continuation of his base salary and his health,
disability and life insurance for a period of eighteen months, subject to
mitigation in the last six months of such period, and the right to exercise any
options granted under the agreement which are not otherwise exercisable, which
options will remain exercisable during the period in which he continues to
receive the aforementioned severance benefits. Mr. Stoneback was also granted
under the agreement options to purchase 60,000 shares, 

                                       49

<PAGE>

restated for the effect of the one-for-five reverse Common Stock split 
implemented on January 8, 1999, of Registrant's Common Stock, at the market 
price. Registrant provides long-term disability insurance equal to 60% of Mr.
Stoneback's base salary, a $1 million life insurance policy and automobile, 
vacation and other insurance benefits as are available to Registrant's other 
senior executive officers. During the term of the agreement and for a period of 
one year thereafter, Mr. Stoneback is prohibited from competing with Registrant 
in any respect, interfering with Registrant's business relationships or 
soliciting business from Registrant's customers.

Effective January 1999, the Registrant terminated the employment of Mr. Stahl,
Vice President of Sales and Marketing. Mr. Stahl received as severance benefits
his base salary, health and disability insurance until January 29, 1999.

In June 1992, Registrant adopted a severance benefits program for certain key
employees, including Messrs. Stewart and Woodward. Under the terms of this
program, a participant whose employment is terminated by Registrant other than
for cause and other than following a change in control is entitled to continue
receiving his then-current base salary and coverage under the medical, dental,
supplemental life and supplemental disability insurance policies, if any, being
provided at the time of termination for a specified period, with the obligation
to provide such insurance coverage terminating in the event the participant is
provided substantially the same coverage from a new employer. Each of Messrs.
Stewart and Woodward is entitled to continue receiving such base salary and
insurance coverage for a period of one year under the foregoing circumstances.
In addition, if, within two years following a change in control of Registrant, a
participant's employment is terminated without cause or the participant resigns
following (a) the relocation of his principal business location, (b) a
significant reduction in the duties or responsibilities from those existing
prior to the change in control, or (c) a reduction in his then-current base
salary, then, in any such event, the participant is also entitled to continue
receiving his then-current base salary and coverage under the aforementioned
insurance program (subject to the restriction described above) for a specified
period. Messrs. Stewart and Woodward are entitled to continue receiving their
respective base salaries for a period of 12 months under such circumstances. In
addition, under such circumstances, each of Messrs. Stewart and Woodward is also
entitled to continue receiving the aforementioned insurance coverages for a
period of 12 months, and all unvested options which they hold become exercisable
in full and all outstanding options remain exercisable for the lesser of the
remaining scheduled term thereof or an extended exercise period, which is one
year for options granted after December 1996 and five years for options granted
before January 1997.

Item 12. Security Ownership of Certain Beneficial Owners and Management

As of March 15, 1999, the following persons were known to Registrant to be the
beneficial owners of more than 5% of Registrant's Common Stock:


<TABLE>
<CAPTION>

                                                       Number of                    Percent
Name and Address                                       Shares                       of Class
----------------                                       ------                       --------
<S>                                                    <C>                          <C>  
Steven T. Newby.....................................   180,000 (1)                  9.10%
6116 Executive Blvd.
Rockville, MD 20852

Kontron Instruments Holding N.V.....................   139,130                      7.03%
Julianaplein 22
Curacao, Netherlands Antilles
</TABLE>


------------
(1) Information furnished by stockholder as of January 3, 1999

                                       50
<PAGE>

Security Ownership of Management

The following table sets forth the beneficial ownership of the Common Stock of
Registrant as of March 15, 1999 by each director, each executive officer named
in the Summary Compensation Table and by all directors and executive officers as
a group. The persons named in the table below have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the information
contained in the table and notes thereto.

<TABLE>
<CAPTION>
                                                                  Shares Beneficially Owned
                                                                  ----------------------------
Name                                                                    Number          Percent
----                                                                    ------          -------

<S>                                                                   <C>    <C>         <C>  
Richard J. DePiano................................................    62,450 (1)         3.11%
Jay L. Federman...................................................    60,539 (2)         3.04%
Sheldon M. Bonovitz...............................................    48,223 (3)         2.42%
W. Keith Stoneback................................................    47,333 (4)         2.34%
Michael R. Stewart................................................    28,558 (5)         1.42%
Davis Woodward....................................................    26,888 (6)         1.34%
Vincenzo Morelli..................................................    12,000 (7)           *
Glenn H. Stahl....................................................     5,000 (8)           *
All directors and executive officers as a group (7 persons).......   285,991 (9)        13.37%
</TABLE>

------------
*  Less than one percent.

(1)  Includes 29,450 shares which Mr. DePiano has the right to acquire under
     outstanding stock options exercisable within 60 days after March 15, 1999.
     Also includes 18,000 shares owned by Mr. DePiano's wife. Mr. DePiano
     disclaims beneficial ownership of such 18,000 shares.

(2)  Includes 13,700 shares which Dr. Federman has the right to acquire under
     outstanding stock options exercisable within 60 days after March 15, 1999
     and 2,499 shares owned by Dr. Federman's child. Dr. Federman disclaims
     beneficial ownership of such 2,499 shares.

(3)  Includes 17,450 shares which Mr. Bonovitz has the right to acquire under
     outstanding stock options exercisable within 60 days after March 15, 1999,
     5,005 shares owned by Mr. Bonovitz' wife and 5,846 shares owned by trusts
     of which Mr. Bonovitz is trustee for the benefit of Mr. Bonovitz' children.
     Mr. Bonovitz disclaims beneficial ownership of the 10,851 shares owned by
     his wife and such trusts. Also includes 5,823 shares owned by the Marital
     Trust Under the Will of Robert H. Fleisher, Deceased. Mr. Bonovitz is one
     of the four trustees of such trust and disclaims beneficial ownership of
     such 5,823 shares. Also includes 5,100 shares owned by a pension trust of
     which Mr. Bonovitz is the beneficiary.

(4)  Includes 43,333 shares which Mr. Stoneback has the right to purchase under
     outstanding stock options exercisable within 60 days after March 15, 1999.

(5)  Includes 27,272 shares which Mr. Stewart has the right to purchase under
     outstanding stock options exercisable within 60 days after March 15, 1999.

                                       51
<PAGE>

(6)  Includes 22,106 shares which Mr. Woodward has the right to purchase under
     outstanding stock options exercisable within 60 days after March 15, 1999.

(7)  Includes 3,000 shares held of record by Olive Branch Corp., a Liberian
     corporation controlled by members of Mr. Morelli's family. Mr. Morelli
     disclaims beneficial ownership of such shares. Also includes 8,000 shares
     which Mr. Morelli has the right to purchase under outstanding stock options
     exercisable within 60 days after March 15, 1999.

(8)  Represents 5,000 shares which Mr. Stahl has the right to purchase under
     outstanding stock options exercisable within 60 days after March 15, 1999.

(9)  Includes 161,311 shares which such persons have the right to purchase under
     stock options exercisable within 60 days after March 15, 1999.

Item 13. Certain Relationships and Related Transactions

Certain Transactions

Kontron Instruments Holding N.V., which owns more than 5% of Registrant's
outstanding Common Stock, has affiliates that have served as Registrant's
distributors throughout most of Europe. In March, 1997, Registrant and Kontron
Instruments agreed to terminate the distribution agreement entered into in 1993,
under which Kontron Instruments had been Registrant's distribution
representative for most of Europe. Kontron Instruments has agreed to continue to
represent Registrant in certain countries in Europe until successor distribution
partners are identified by Registrant. During 1998, total sales by Registrant to
such affiliates were $53,000. Vincenzo Morelli, a director of Registrant, served
as the Chief Executive Officer of Kontron Instruments until December 1998.

                                       52

<PAGE>

<TABLE>
<CAPTION>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)  1. Financial Statements                                                                      Page
                                                                                                  ----
<S>                                                                                              <C>
Consolidated Balance Sheets at January 3, 1999 and December 29, 1997..............................23

Consolidated Statements of Operations for each of the three years in the
   period ended January 3, 1999...................................................................24

Consolidated Statements of Stockholders' Equity for each of the three years in the
   period ended January 3, 1999 ..................................................................25

Consolidated Statements of Cash Flows for each of the three years in the
   period ended January 3, 1999 ..................................................................26

Notes to Consolidated Financial Statements........................................................27
Report of Independent Public Accountants..........................................................22

2.   Financial Statement Schedules                                                                Page
                                                                                                  ----
Schedule II - Valuation and Qualifying Accounts for the three years in the period
   ended January 3, 1999..........................................................................44

Other schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
consolidated financial statements or notes thereto.
</TABLE>

(b)  Reports on Form 8-K
     -------------------

No reports on Form 8-K were filed during the fourth quarter of the fiscal year
ended January 3, 1999.

(c)  Exhibits
     --------

Exhibit Number        Description of Exhibit
--------------        ----------------------

3.1     Restated Certificate of Incorporation of Registrant as amended.

3.2     By-laws of Registrant, as amended, incorporated by reference to Exhibit
        3.2 filed with Registrant's Annual Report on Form 10-K for the fiscal
        year ended December 30, 1990 filed on March 29, 1991 (the "1990 Form
        10-K").

10.1    Lease dated September 12, 1991 between Registrant and SLT Properties,
        Inc., incorporated by reference to Exhibit 10.1 filed with Registrant's
        Annual Report on Form 10-K for the fiscal year ended December 29, 1991
        filed on March 30, 1992 (the "1991 Form 10-K").

10.2    Lease Agreement dated May 29, 1996, between Registrant and Nappen &
        Associates, incorporated by reference to Exhibit 10.51 filed with
        Registrant's Form 10-Q for the fiscal quarter ended June 30, 1996 filed
        on August 19, 1996 (the "Second Quarter 1996 Form 10-Q").

                                       53

<PAGE>


10.3*   Employment Agreement dated August 5, 1996, between Registrant and W.
        Keith Stoneback, incorporated by reference to Exhibit 10.1 filed with
        Registrant's Form 10-Q for the fiscal quarter ended September 29, 1996
        filed on November 15, 1996 (the "Third Quarter 1996 Form 10-Q").

10.4*   1986 Non-Qualified Stock Option Plan of Registrant, as amended through
        November 29, 1989, incorporated by reference to Exhibit 4(B) filed with
        the Registrant's Form S-8 Registration Statement filed on December 29,
        1989, Registration No. 33-32835 (the "1989 Form S-8).

10.5*   Registrant's Equity Incentive Plan, as amended through October 10, 1996,
        incorporated by reference to Exhibit 4 filed with Registrant's Form S-8
        Registration Statement filed on January 3, 1997, Registration No.
        333-19229.

10.6*   Second Amended and Restated Stock Option Plan for Outside Directors of
        Registrant, incorporated by reference to Exhibit 4(B) filed with
        Registrant's Form S-8 Registration Statement filed on August 19, 1994,
        Registration No. 33-83074 (the "1994 Form S-8").

10.7    Collaboration and Assignment Agreement dated as of March 7, 1995 among
        Registrant, Daniel M. Schuman, M.D. and the AMERICA Charitable Fund,
        incorporated by reference to Exhibit 10.7 filed with Registrant's
        Amendment No. 1 to Annual Report on Form 10-K/A filed on August 28, 1996
        (the "1995 Form 10-K/A").

10.8*   Registrant's 1997 Executive Staff Bonus Program adopted January 17,
        1997, incorporated by reference to Exhibit 10.54 filed with Registrant's
        Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year
        ended December 29, 1996 filed on April 7, 1997 ("the 1996 Form 10-K/A").

10.9    Employment Agreement dated March 1, 1987 between Registrant and Norio
        Daikuzono, incorporated by reference to Exhibit 10.22 filed with the
        Form S-1, as amended by Settlement Agreement and Limited Mutual Release
        dated November 7, 1997 incorporated by reference to Exhibit 10.9 filed
        with the Registrant's Annual Report on Form 10-K for the fiscal year
        ended December 28, 1997, filed on March 25, 1998 ("the 1997 Form 10-K").

10.10   Agreement of Sale dated November 25, 1998, between Lenfest Oaks, Inc.
        (an affiliate of Suburban Cable TV Co. Inc.) and SLT Properties, Inc.

10.11   License Agreement dated December 11, 1990 among Registrant, Advanced
        Laser Systems Technology, Inc., Robert E. McKinney, Dennis R. Bellar,
        Randel W. Owen, and Jim D. Keatley, incorporated by reference to Exhibit
        10.11 filed with the 1990 Form 10-K.

10.12   Agreement of Sale dated September 14, 1990 between Oaks Associates and
        SLT Properties, Inc., incorporated by reference to Exhibit 10.12 filed
        with the 1990 Form 10-K.

10.13   Installment Sale Agreement dated September 14, 1990 between SLT
        Properties, Inc. and Montgomery County Industrial Development
        Corporation, incorporated by reference to Exhibit 10. 14 filed with the
        1990 Form 10-K, as amended pursuant to the Amended and Restated
        Installment Sale Agreement dated November 25, 1991 between SLT
        Properties, Inc. and Montgomery County Industrial Development
        Corporation, incorporated by reference to Exhibit 10.22 filed with
        Registrant's 1991 Form 10-K.

                                       54


<PAGE>


10.14   Acquisition Agreement dated September 14, 1990 between SLT Properties,
        Inc. and Montgomery County Industrial Development Corporation,
        incorporated by reference to Exhibit 10.15 filed with Registrant's 1990
        Form 10-K.

10.15   Amended and Restated Loan Agreement dated December 1, 1992 among
        Registrant, Meridian Bank, SLT Properties, Inc., SLT Technology, Inc.,
        Diversified Properties-Equity Group, Inc. and Surgical Laser
        Technologies Development, Inc., incorporated by reference to Exhibit
        10.20 filed with Registrant's Annual Report on Form 10-K for the fiscal
        year ended January 3, 1993 filed on April 19, 1993 (the "1992 Form
        10-K"); as amended pursuant to a First Amendment thereto dated July 26,
        1993, incorporated by reference to Exhibit 10.15 filed with Registrant's
        Annual Report on Form 10-K for the fiscal year ended January 2, 1994
        filed on April 1, 1994 (the "1993 Form 10-K"); as amended pursuant to a
        Second Amendment thereto dated January 19, 1995, incorporated by
        reference to Exhibit 10.15 filed with Registrant's Annual Report on Form
        10-K for the fiscal year ended January 1, 1995 filed on April 3, 1995
        (the "1994 Form 10-K"); as amended pursuant to a Third Amendment thereto
        dated December 20, 1995 and as amended pursuant to a Letter Agreement
        accepted March 14, 1996 filed with Registrant's 1995 Form 10-K/A; as
        amended by Letter Agreement dated November 5, 1997 from CoreStates Bank
        (successor to Meridian Bank) to Registrant, incorporated by reference to
        Exhibit 10.15 filed with Registrant's 1997 Form 10-K; and as further
        amended by Letter Agreement dated March 17, 1999 from First Union
        Corporation (successor to CoreStates Bank) to Registrant.

10.16   Turnkey Development Agreement dated September 14, 1990 between SLT
        Properties, Inc. and Oaks Associates, incorporated by reference to
        Exhibit 10.21 filed with Registrant's 1990 Form 10-K.

10.17   Sixth Amended and Restated Line of Credit Note in the principal amount
        of $2,750,000 dated January 19, 1995, of Registrant to Meridian Bank,
        incorporated by reference to Exhibit 10.17 filed with Registrant's 1994
        Form 10-K.

10.18   Amended and Restated Security Agreement amended through December 1, 1992
        dated December 1, 1992 among Registrant, Meridian Bank, SLT Properties,
        Inc., SLT Technology, Inc., Diversified Properties-Equity Group, Inc.
        and Surgical Laser Technologies Development, Inc., incorporated by
        reference to Exhibit 10.22 filed with Registrant's 1992 Form 10-K.

10.19   Pledge Agreement dated April 13, 1992 by SLT Technology, Inc. to
        Meridian Bank, as amended by First Amendment to Pledge Agreement dated
        December 1, 1992, incorporated by reference to Exhibit 10.23 filed with
        Registrant's 1992 Form 10-K.

10.20   Mortgage Note in the principal amount of $3,400,000 dated August 16,
        1991 and delivered September 12, 1991 by Registrant, SLT Properties,
        Inc. and Montgomery County Industrial Development Corporation in favor
        of American United Life Insurance Company, incorporated by reference to
        Exhibit 10.35 filed with Registrant's 1991 Form 10-K.

10.21   Mortgage dated August 16, 1991 and delivered September 12, 1991 among
        SLT Properties, Inc., Montgomery County Industrial Development
        Corporation and American United Life Insurance Company, incorporated by
        reference to Exhibit 10.36 filed with Registrant's 1991 Form 10-K.


                                       55

<PAGE>


10.22   Guaranty Agreement dated August 16, 1991 and delivered September 12,
        1991 between Registrant and American United Life Insurance Company,
        incorporated by reference to Exhibit 10.37 filed with Registrant's 1991
        Form 10-K.

10.23   Assignment of Rents and Leases dated August 16, 1991 and delivered
        September 12, 1991 by SLT Properties, Inc. and Montgomery County
        Industrial Development Corporation to American United Life Insurance
        Company, incorporated by reference to Exhibit 10.38 filed with
        Registrant's 1991 Form 10-K.

10.24   Security and Pledge Agreement dated September 12, 1991 by SLT
        Properties, Inc. in favor of American United Life Insurance Company,
        incorporated by reference to Exhibit 10.39 filed with Registrant's 1991
        Form 10-K.

10.25   Loan Agreement effective November 25, 1991 between Montgomery County
        Industrial Development Corporation and Pennsylvania Industrial
        Development Authority, incorporated by reference to Exhibit 10.40 filed
        with Registrant's 1991 Form 10-K.

10.26   Note in the principal amount of $2,000,000 dated November 20, 1991 and
        delivered December 2, 1991 by Montgomery County Industrial Development
        Corporation to Pennsylvania Industrial Development Authority,
        incorporated by reference to Exhibit 10.41 filed with Registrant's 1991
        Form 10-K.

10.27   Open-end Mortgage made November 20, 1991 and delivered December 2, 1991
        between Montgomery County Industrial Development Corporation and
        Pennsylvania Industrial Development Authority, incorporated by reference
        to Exhibit 10.42 filed with Registrant's 1991 Form 10-K.

10.28   Consent, Subordination and Assumption Agreement dated November 20, 1991
        and delivered December 2, 1991 by SLT Properties, Inc. and Montgomery
        County Industrial Development Corporation in favor of Pennsylvania
        Industrial Development Authority, incorporated by reference to Exhibit
        10.43 filed with Registrant's 1991 Form 10-K.

10.29   Assignment of Installment Sale Agreement dated November 20, 1991 and
        delivered December 2, 1991 among Montgomery County Industrial
        Development Corporation, SLT Properties, Inc. and Pennsylvania
        Industrial Development Authority, incorporated by reference to Exhibit
        10.44 filed with Registrant's 1991 Form 10-K.

10.30   Assignment of Lease Agreement dated November 20, 1991 and delivered
        December 2, 1991 among Registrant, SLT Properties, Inc. and Pennsylvania
        Industrial Development Authority, incorporated by reference to Exhibit
        10.45 filed with Registrant's 1991 Form 10-K.

10.31   Guaranty and Surety Agreement dated December 2, 1991 by Registrant in
        favor of Pennsylvania Industrial Development Authority, incorporated by
        reference to Exhibit 10.46 filed with Registrant's 1991 Form 10-K.

10.32   Agreement for Additional Security dated September 14, 1990 among
        Registrant, SLT Properties, Inc. and Montgomery County Industrial
        Development Corporation, incorporated by reference to Exhibit 10.47
        filed with Registrant's 1991 Form 10-K; as amended by Pledge Agreement
        dated 

                                       56

<PAGE>

        December 1, 1992, incorporated by reference to Exhibit 10.36 filed
        with Registrant's 1992 Form 10-K.

10.33   Pledge and Security Agreement effective December 2, 1991 among
        Registrant, SLT Properties, Inc. and Montgomery County Industrial
        Development Corporation, incorporated by reference to Exhibit 10.48
        filed with Registrant's 1991 Form 10-K.

10.34   Security Agreement dated December 1, 1992 among Registrant, SLT
        Properties, Inc. and Montgomery County Industrial Development
        Corporation, incorporated by reference to Exhibit 10.38 filed with
        Registrant's 1992 Form 10-K.

10.35   Form of Registrant's 8% Convertible Subordinated Note due July 30, 1999,
        incorporated by reference to Exhibit 10.39 filed with Registrant's 1992
        Form 10-K.

10.36*  Form of Agreements dated June 12, 1992 between Registrant and Executive
        Officers with respect to severance and change of control benefits,
        incorporated by reference to Exhibit 10.40 filed with Registrant's 1992
        Form 10-K, as amended by Letter Agreement dated January 24, 1997
        incorporated by reference to Exhibit 10.36 filed with Registrant's 1996
        Form 10-K/A.

10.37   Lease Agreement dated March 5, 1990 between Duke Associates #77 Limited
        Partnership and Registrant and Lease Addendum Number One dated March 30,
        1990, incorporated by reference to Exhibit 10.41 filed with Registrant's
        1992 Form 10-K.

10.38   Property Agreement dated October 30, 1996, among Registrant, Terry A.
        Fuller, and Fuller Research Corporation, incorporated by reference to
        Exhibit 10.4 filed with Registrant's Third Quarter 1996 Form 10-Q.

10.39   Amendment to the Joint Venture and other Agreements dated September 30,
        1996, among Registrant; Mediq/PRN Life Support Services, Inc.; and Mediq
        PRN/SLT, incorporated by reference to Exhibit 10.5 filed with
        Registrant's Third Quarter 1996 Form 10-Q.

10.40   Investment Agreement dated December 8, 1994 between Registrant and
        Kontron Instruments Holding N.V., incorporated by reference to Exhibit
        10.42 filed with Registrant's 1994 Form 10-K.

10.41   Amendment to Confidentiality and Non-Compete Agreement dated April 28,
        1994 between Registrant and Terry A. Fuller, amending Confidentiality
        and Non-Compete Agreement dated June 6, 1990, incorporated by reference
        to Exhibit 10.43 filed with Registrant's 1994 Form 10-K, as amended
        pursuant to Severance Agreement dated November 5, 1996, between
        Registrant and Dr. Fuller, incorporated by reference to Exhibit 10.3
        filed with Registrant's Third Quarter 1996 Form 10-Q, and as further
        amended pursuant to Addendum dated December 20, 1996, between Registrant
        and Dr. Fuller, incorporated by reference to Exhibit 10.43 filed with
        Registrant's 1996 Form 10-K/A.

10.42   Guaranty dated December 29, 1994 from Registrant to KCI Financial
        Services, Inc., incorporated by reference to Exhibit 10.44 filed with
        Registrant's 1994 Form 10-K.

10.43   Negative Pledge Agreement dated January 19, 1995 between Registrant and
        Meridian Bank, incorporated by reference to Exhibit 10.45 filed with
        Registrant's 1994 Form 10-K.


                                       57

<PAGE>


10.44   International Facilities Agreement dated January 19, 1995 between
        Registrant and Meridian Bank, incorporated by reference to Exhibit 10.46
        filed with Registrant's 1994 Form 10-K.

10.45   $629,430.53 Standby Letter of Credit dated as of January 1, 1995 issued
        by Meridian Bank to Montgomery County Industrial Development Corporation
        for the account of Registrant, incorporated by reference to Exhibit
        10.47 filed with Registrant's 1994 Form 10-K, as amended by an Amendment
        dated December 22, 1995 reducing the amount of the Letter of Credit to
        $575,607, incorporated by reference to Exhibit 10.47 filed with
        Registrant's 1995 Form 10-K/A, as amended by an Amendment dated December
        24, 1997 incorporated by reference to Exhibit 10.47 filed with
        Registrant's 1997 form 10-K; as further amended by Amendment dated
        December 28, 1998.

10.46   Sublease Agreement dated March 21, 1996 among Registrant; SLT
        Properties, Inc.; and Suburban Cable TV Co. Inc., incorporated by
        reference to Exhibit 10.48 filed with Registrant's Second Quarter 1996
        Form 10-Q.

10.47   Subordination, Non-Disturbance and Attornment Agreement dated April 30,
        1996, and delivered May 13, 1996, among Registrant; SLT Properties,
        Inc.; Suburban Cable TV Co. Inc.; and American United Life Insurance
        Company, incorporated by reference to Exhibit 10.50 filed with
        Registrant's Second Quarter 1996 Form 10-Q.

10.48   Non-Disturbance, Subordination and Attornment Agreement dated August 1,
        1996, among Montgomery County Industrial Development Corporation; SLT
        Properties, Inc., Registrant; and Suburban Cable TV Co. Inc.,
        incorporated by reference to Exhibit 10.6 filed with Registrant's Third
        Quarter 1996 Form 10-Q.

10.49   Non-Disturbance, Subordination and Attornment Agreement dated October
        22, 1996 among Pennsylvania Industrial Development Authority; SLT
        Properties, Inc.; Registrant; and Suburban Cable TV Co. Inc.,
        incorporated by reference to Exhibit 10.51 filed with Registrant's 1996
        Form 10-K/A.

21      Subsidiaries of Registrant, incorporated by reference to Exhibit 22
        filed with Registrant's 1993 Form 10-K.

23      Consents of Arthur Andersen LLP.

27      Financial Data Schedule, January 3, 1999.

* This exhibit represents a management contract or compensatory plan or
arrangement.

                                       58
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.


Dated: March 29, 1999                       SURGICAL LASER TECHNOLOGIES, INC.

                                            By:  /s/ W. Keith Stoneback
                                                 -----------------------
                                                 W. Keith Stoneback
                                                 President and Chief Executive
                                                 Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signatures                    Title                                              Date
----------                    -----                                              ----

<S>                           <C>                                               <C> 
/s/ W. Keith Stoneback        President, Chief Executive Officer and             March 29, 1999
-----------------------       Director (principal executive officer)
W. Keith Stoneback            

/s/ Michael R. Stewart        Vice President, Chief Financial Officer, and       March 29, 1999
-----------------------       Treasurer (principal financial
Michael R. Stewart            and accounting officer)        

/s/ Richard J. DePiano        Chairman of the Board and                          March 29, 1999
-----------------------       Director
Richard J. DePiano            

/s/ Sheldon M. Bonovitz       Director                                           March 29, 1999
-----------------------
Sheldon M. Bonovitz

/s/ Jay L Federman            Director                                           March 29, 1999
-----------------------
Jay L. Federman

/s/ Vincenzo Morelli          Director                                           March 29, 1999
-----------------------
Vincenzo Morelli
</TABLE>



                                       59